SINGAPORE, Oct 17 (Reuters) - Spot iron ore prices may extend losses this week after sliding to their weakest in more than 11 months as benchmark steel futures in top consumer China fell to a 14-month low on Monday.
Shanghai steel futures slid more than 3 percent in their steepest decline since June 2010 on mounting worries about too much supply in China and sluggish demand.
Supply of iron ore in the spot market has risen sharply with cargoes meant for long-term, or three-month, contracts being sold at spot rates because Chinese mills were not keen on buying the material at contract rates that are far higher than spot.
Under supply contracts for the fourth quarter, miners are charging more than $175 a tonne for iron ore based on a pricing system that averages spot prices over a previous three-month period.
But spot rates have fallen to under $160 a tonne on Friday as weaker steel demand in China cut appetite for iron ore, the key raw material in making steel.
"It's difficult to say where the bottom is for prices. At the moment, it seems that $150 probably won't be the bottom for 62 (grade ore)," said a Shanghai-based iron ore trader.
"We haven't seen any change in sentiment. If the miners will continue to put all these spot cargoes in the market I believe the price will be pushed further down."
Iron ore with 62 percent iron content fell 1.7 percent to $157.50 a tonne on Friday, according to the Steel Index .IO62-CNI=SI, and down 1.7 percent to $157.25 based on Platts IODBZ00-PLT. Both are the lowest levels since early November last year.
Both indexes lost more than 7 percent last week, their biggest weekly drop since early July 2010.
Those losses could stretch this week, with steel futures in China down for a third straight session on Monday.
The most-active January rebar contract on the Shanghai Futures Exchange SRBc4 fell 3.2 percent to close at 4,178 yuan a tonne, after hitting the lowest since August 2010 on a continuation basis at 4,172 yuan.
It was the biggest percentage drop for the fourth-month contract since June 7, 2010, when it fell 3.3 percent.
"Steel mills are not willing to cut production until they see negative margins - one reason we believe that steel prices have not yet reached a bottom," Henry Liu, regional head of commodity research at Mirae Asset Securities in Hong Kong, said in a research note.
The cash profit of Chinese steel mills has declined to $34 a tonne from $66 in early September, Liu said, adding that with the expected slowdown in Chinese construction activities, "we think steel mills will continue to suffer margin squeeze".
Daily crude steel output at Chinese mills averaged 1.9339 million tonnes in the first 10 days of October, up 0.2 percent from Sept. 21-30, according to data on Monday from the China Iron and Steel Association.
But some traders said some small Chinese mills have begun curbing output because of thinning margins, while the bigger ones have sought to cut their costs by trying to buy iron ore from the spot market.
Iron ore miners have given mills, which usually buy via long-term contracts, the option to secure the material cheaper, sources at mills said on Friday.
Some are replenishing inventories by buying from stocks held at Chinese ports which are cheaper than those in the spot market, said another trader in Shanghai.
"They are buying small lots, just enough to feed their furnace. They anticipate prices to drop further so it's not a good time to buy big blocks which arrive in two weeks time," he said.
Stockpiles of imported iron ore at major Chinese ports fell 1 percent to 92.17 million tonnes last week, the fifth weekly decline in a row.
Australian iron ore miner Fortescue Metals Group still believes strong demand growth in China will help underpin prices.
"We're not deterred by some of the short-term softening in the market," Fortescue Chief Executive Nev Power told reporters.
"Most of that appears to be a carry over from the financial uncertainty in Europe and once that is sorted out we'll see most of the volatility and cautiousness in the Asian markets disappear," Power said.