* Rebar edged higher, gains limited
* Iron ore tumbling to near 9-month low, breaking the $120 mark
* Some expect buyers to return to market for cheap iron ore
SHANGHAI/BEIJING, July 26 (Reuters) - China steel futures recovered slightly on Thursday from a record low earlier this week, but tepid demand and high inventories are expected to curb gains and weigh on iron ore prices, now at nine-month lows.
The most active rebar contract on the Shanghai Futures Exchange edged up to 3,711 yuan ($580) per tonne by midday, up 0.22 percent from the previous day, but remains within touching distance of a record low of 3,652 yuan per tonne hit on Monday.
A persistent decline in steel prices in the world's largest steel producer and consumer this month has eroded steel mill profits, and with little hope of any immediate recovery in demand, flagging prices are likely to continue to weigh on the price of iron ore, the key steelmaking raw material.
"The average cost of iron ore for steel mills is around $135 a tonne excluding tax. If the rebar price falls below 4,000 yuan per tonne, including tax, any cash profit margin is wiped out," commodity analysts with Mirae Asset Securities said in a research note.
Benchmark iron ore with 62 percent iron content .IO62-CNI=SI fell below the pyschologically important barrier of $120 a tonne on Wednesday, dropping for the eleventh session in a row to $118.60 a tonne, its lowest since Oct. 31, 2011.
The shrinking appetite for iron ore from the world's top buyer also hurt the second-quarter profits of Brazilian miner Vale, making it the latest victim of China's economic slowdown.
Net income at the world's largest iron ore producer fell 59 percent from a year earlier to $2.66 billion, its lowest in more than two years.
However, some industry analysts believe the steep decline in iron ore prices may bring buyers who have remained on the sidelines back to the market.
"We expect the recent falls to encourage some buyers back into the market shortly. The rise in transactions seen on Wednesday, despite the large drops in prices, does suggest buyers are again looking at purchasing more material," Metal Bulletin Iron Ore Index said in a daily note.
Shanghai rebar futures and iron ore indexes at 0410 GMT
Contract Last Change Pct Change
SHANGHAI REBAR* 3711 8.00 0.22
PLATTS 62 PCT INDEX 119.75 -1.75 -1.44
THE STEEL INDEX 62 PCT INDEX 118.6 -4.30 -3.50
METAL BULLETIN INDEX 119.84 -2.40 -1.96
#Index in dollars/tonne, show close for the previous trading day
($1 = 6.3885 Chinese yuan)