Iron ore falls through $130 as Chinese steel price hits 2012 low

On Tuesday the globe's most active steel futures contract – Shanghai rebar for January delivery – dropped to its lowest level this year reaching Rmb3,846 ($603) per tonne.

A build-up in inventories – Chinese mills have been producing at record pace of 2 million tonnes per day since April – and a steep drop-off in demand as China's building boom begins to look more and more unsustainable are behind the slump.

China almost produces more steel per year than the rest of the world combined and the weak market is quickly flowing through to iron ore.

"There's very poor demand for downstream products which will not support mills keeping their production high. They might be cutting production soon that's why they're holding off from buying iron ore." an iron ore trader in Shanghai told Reuters.

Iron ore prices have found support at $130 a tonne this year – below that many domestic Chinese iron ore miners and high-cost producers elsewhere become unprofitable – but on Tuesday benchmark 62% iron ore imported into the port city Tianjin in northern China fell to a two month low of $129.40 a tonne according to Steel Index data.

The steelmaking ingredient is down 3.4% in just the last week and more than 25% below the $174 a tonne struck this time last year. Tianjin 62% ore averaged a record $168 during 2011.

Further clouding the outlook is record iron ore supply from BHP Billiton and Rio Tinto. The number two and three producers behind Brazil's Vale are expected to produce a combined 400 million tonnes this year.