Dalian iron ore futures fell more than 2 percent on Friday, hitting their lowest level since their October launch and dragging down Shanghai steel prices on worries the closure of some mills may trim demand for the steelmaking ingredient. A number of steel mills in China's top producing province of Hebei have been ordered to shut some of their facilities to limit power use as Beijing steps ups efforts to address air pollution.

 

Hebei produces about a quarter of China's output, which reached a record 716.5 million tonnes last year. The closures are in Wu'an city which has an annual crude steel capacity of 40-50 million tonnes. The most-traded iron ore for May delivery on the Dalian Commodity Exchange closed 2.1 percent lower at 914 yuan ($151) a tonne, after falling to as low as 905 yuan earlier. That was its weakest level since China launched the iron ore futures on October 18.

 

Losses spilled over to steel futures in Shanghai, pulling prices away from 11-week highs reached on Thursday. The most-active rebar on the Shanghai Futures Exchange , also for delivery in May, fell 1.6 percent to 3,676 yuan a tonne, after rising to as high as 3,745 yuan in the prior session. Rebar dropped 0.4 percent for the week, its first decline in four weeks. "The steel production cuts would mean less demand for iron ore," said a trader in Singapore, adding that steel prices are coming off too as the cost factor eases.

 

Even before the closure of some mill facilities in Hebei, China's steel output was dropping in response to leaner demand as falling temperatures in the country curbs construction activity. Average daily crude steel production dropped 3.3 percent from October to 2.029 million tonnes last month, based on data from the National Statistics Bureau.

 

Spot iron ore prices fell on Thursday after a recent run-up to near $140 a tonne driven by mills building winter stockpiles. Benchmark 62 percent grade iron ore for immediate delivery to China's Tianjin port dropped 0.9 percent to $137.90 a tonne, according to data compiler Steel Index. "I think the stockpiling is still going on but the volume is not as strong as we've seen before," said a trader in Shanghai.

 

He said the sale of a 65.85 percent grade Brazilian cargo on Thursday against the Platts index average plus $9.90, which comes to around $155 a tonne, was about the same level as a previous sale, suggesting buying interest remains intact. But investment bank ANZ says the drop in the benchmark price "may be the beginning of softer iron ore prices coming into the year-end". "We expect high inventory levels, the closing of a pre-Chinese New Year purchase window and reduced crude steel output to drive iron ore directionally lower after its buoyant performance in recent months," ANZ said in a note. Iron ore inventories at major Chinese ports have been rising since the start of November, increasing another 1.2 million tonnes to 88.7 million tonnes last week, according to industry consultancy Mysteel.