Iron ore futures in China and Singapore dropped on Monday to the lowest since their launch last year, reflecting plentiful supply and tighter credit that has slowed purchases by Chinese mills despite a more than 30 percent plunge in spot prices this year.
The weaker futures suggest spot iron ore prices could extend their drop to below $90 a tonne later in the day to touch a fresh low since September 2012.
"Liquidity is a big issue at the moment because many banks are not willing to open letters of credit," said an iron ore trader in Shanghai.
A probe into metal financing deals in China's Qingdao port has spurred caution among lenders, traders said, many of which have already been trimming their exposure to sectors plagued by overcapacity such as the steel sector.
Iron ore for delivery in September on the Dalian Commodity Exchange fell to as low as 658 yuan ($110) a tonne, its weakest since the bourse introduced the contract in October.
It was down 0.6 percent at 661 yuan by midday.
The July iron ore contract on the Singapore Exchange dropped nearly 1 percent to $88.99 per tonne, its lowest since SGX launched the futures in April last year.
Iron ore for immediate delivery to China fell 0.7 percent to $90.90 a tonne on Friday, its lowest since Sept. 7, 2012, according to data compiler Steel Index.
A break below the September 2012 trough of $86.70 will put spot iron ore closer to levels last seen in 2009.
Down more than 32 percent so far this year, iron ore prices have been largely dragged down by increased supply as miners led by Vale, Rio Tinto and BHP Billiton boost output to sell more to top market China.
But with the steep drop in iron ore prices potentially closing up to 80 million tonnes of domestic mine production in China, the top foreign miners stand to gain given their lower business costs, Wood Mackenzie analyst Andrew Hodge said.
Rio Tinto breaks even at around $43 a tonne, while rival Australian miner BHP needs a $45 iron ore price to stay in the black. Vale's is higher at $75 a tonne due to the greater distance from Brazil to China.
"Mills are buying in small lots and they keep on pushing prices down sharply," said an iron ore trader in Tianjin, adding a softer real estate market in China is also hurting demand for steel.
The most-active October rebar contract on the Shanghai Futures Exchange touched a low of 3,009 yuan a tonne, its weakest since the exchange launched rebar futures in March 2009.
That followed a further decline in spot steel prices in China over the weekend, with Tangshan billet falling 40 yuan to around 2,760 yuan per tonne, traders said.
High inventories of iron ore stocks at Chinese ports have also pushed mills to do "short rounds of restocking rather than aggressive restocking as seen in previous years", investment bank ANZ said in a note.
Iron ore at Chinese ports stood at 113.2 million tonnes as of June 6 SH-TOT-IRONINV, not far below a record high of 113.6 million tonnes reached the prior week, according to Steelhome which tracks the data.
Shanghai rebar futures and iron ore indexes at 0430 GMT
Contract Last Change Pct Change
SHFE REBAR OCT4 3012 -20.00 -0.66
DALIAN IRON ORE DCE DCIO SEP4 661 -4.00 -0.60
SGX IRON ORE FUTURES JULY 88.99 -0.76 -0.85
THE STEEL INDEX 62 PCT INDEX 90.9 -0.60 -0.66
METAL BULLETIN INDEX 90.81 -0.36 -0.39
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day
($1 = 6.2090 Chinese Yuan Renminbi)