Dalian iron ore dips as China steel profit margins slump

China's iron ore futures dipped on Wednesday, weighed down by concerns over a likely reduction in output by steel mills hit by losses due to high production costs and weak demand.

Shrinking steel profit margins in the world's top producer of the construction and manufacturing material may force mills to put their facilities under maintenance, reducing demand for iron ore and other raw materials, analysts said.

The most-active May iron ore contract on China's Dalian Commodity Exchange ended daytime trading 0.2% lower at 1,041.50 yuan ($161.11) a tonne, after earlier hitting a two-week low of 1,015.50 yuan.

Spot iron ore in China traded at $167.50 a tonne on Tuesday, the weakest since Jan. 4, according to SteelHome consultancy.

Iron ore's February contract on the Singapore Exchange rose 0.7% to $163.20 a tonne by 0715 GMT, reversing early losses.

Dalian coking coal slumped 1.1% while coke lost 1%, after both touched six-week lows early in the session.

As a result of a sharp rise in production costs and weak steel demand, "steel companies in the north have already suffered large-scale losses", Sinosteel Futures analysts said in a note.

"Market demand for raw materials is expected to deteriorate further in the near future," Sinosteel analysts said, also citing the impact of ongoing restrictions in China to curb rising COVID-19 cases and the approaching Lunar New Year holidays.

Prices of key input iron ore remain elevated after last year's spikes driven by robust demand in China, which produced a record-high volume of steel despite the pandemic.

Despite brisk output at home, China's steel imports in 2021 were expected to rise as domestic demand remains strong, supported by stable macroeconomic policies, an industry group said, lending support to steel prices.

Rebar on the Shanghai Futures Exchange rose 1.4%, while hot-rolled coil climbed 1.8%. Stainless steel fell 0.9%.