BEIJING, Jan 5 (Reuters) - Spot iron ore prices in China, the world's biggest market, were steady on Thursday as activity began to pick up following the New Year break, but traders said the outlook remained gloomy.
In the absence of new policies from Beijing to stimulate steel demand, mills will not buy until they really have to, said a Shanghai-based trader.
"I don't think anyone would make any big purchases from the spot market this week, but I expect buying to increase a little on Jan. 10 as they seek to replenish stocks ahead of the Chinese new year," said the trader.
"If you look at the stocks at steel mills, some have about 30 days which is enough to get them through, but I know some have less than seven days and they will have to buy to keep running," he said.
Industry consultancy Umetal said Pilbara fines with 61.5 percent iron content were being offered at a range of $138-140 per tonne on Thursday, up $1 from the previous day.
According to the Steel Index, the price of 62-percent iron ore .IO62-CNI=SI stood at $138.80 per tonne on Wednesday, up 50 cents compared to the previous trading day.
The trader said the rise in offer prices was probably a result of the increase in Indian export tariffs from 20 percent to 30 percent, a move that could reduce shipments by as much as 75 percent in the first quarter of this year.
"The 10 percent increase in the export tariff will help inflate the marginal prices... However, due to the current slowdown of iron ore demand, the upside is limited," said Henry Liu, head of commodity research at Mirae Asset Securities.
Rapid capacity expansion and record levels of steel output helped drive iron ore prices close to $200 per tonne for much of last year, but analysts are concerned that China's steel bubble has now well and truly burst.
Liu said in a note that steel prices were likely to hit a low in January or February and would only rally slightly in the second quarter through an upturn in seasonal demand.
"Steel traders' willingness to build up inventory is very low now. Some traders have closed their business for January," he said.
The most traded steel rebar futures contract in Shanghai ended Thursday at 4,178 yuan ($660) per tonne, inching up 19 yuan from the previous close, but still more than 16 percent lower than its peak in June 2011.
According to Xu Zhongbo, chief executive of Beijing Metal Consulting, persistent steel industry losses in recent months mean that China is likely to see a wave of production cuts after the Lunar New Year holiday, which ends on Jan. 30.
During the last crisis in 2008 and 2009, many small private mills managed to continue making profits even as their struggling state-owned rivals slashed output.
The minnows ignored overcapacity in the sector and expanded output in order to capitalise on a stimulus-driven construction boom -- but this was no longer possible and many are now crippled by debt, said Xu.
"This year is a turning point -- at the moment small mills are still buying iron ore and keeping prices at about $130-140 per tonne, but now 80 percent of mills are making losses, including the small ones," he said.
"I expect that after Chinese New Year, when the market is still not good, iron ore demand will decrease and prices will decrease also," he said.