Indian ore with 63.5 percent iron content was quoted at $182-$185 a tonne, including freight, on Monday, steady from Friday, after dropping as much as $4 in the past week.

China's central bank, keen to put a lid on inflation that is running near a three-year high, has unveiled a series of tightening measures in recent months, including repeated increases in banks' required reserves and interest rates.

Some Chinese steel mills are opting to buy ore from domestic mines because they are cheaper and financing terms are easier.

"If a domestic supplier sends 10,000 tonnes of ore, for example, to a steel mill this month, he can get paid next month. But for imported ore, if you want to buy now, you have to pay now and in cash," said an iron ore trader in China's eastern Shandong province.

The Steel Index's 62 percent iron ore benchmark dropped 80 cents to $174.50 a tonne on Friday and Metal Bulletin's similar index slipped 32 cents to $175.25. Both are the lowest levels since April 5. Platts 62 percent iron ore index was steady at $177.

Lean steel demand is also hurting Chinese appetite for iron ore.

"Generally, steel mills can sell 2,000 tonnes per day of rebar. But now they can only sell 500 to 1,000 tonnes," said the Shandong trader.

The most-traded October rebar contract on the Shanghai Futures Exchange dropped to a more than one-week low of 4,786 yuan on Monday. The contract was down 0.6 percent at 4,794 yuan per tonne by the midday break.

While steel demand during the second quarter when construction in China normally peaks is not as strong as many had expected, the country's daily crude steel output reached another record level in the early days of May.

Traders said steel mills continue to boost output so they would have enough on stock when China's power shortages worsen and when demand picks up.

But big stockpiles of imported iron ore at Chinese ports are keeping demand for fresh cargoes thin.

Inventory of imported iron ore at major Chinese ports reached a record high of 83.54 million tonnes last week, said industry consultancy Mysteel.

Strong Chinese demand and tight Indian supplies helped lift spot iron ore prices to a record high near $200 a tonne in mid-February but prices have since fallen around 9 percent as Chinese buying slowed.

Fewer cargoes during the Indian monsoon season which starts around June should help provide a floor to prices, traders said, adding that the quality concerns raised on shipments from India may be limited to ore from small miners.

"For us, if we buy from India, we always choose to buy from the big companies and those with good reputation," said a Shanghai trader.

"I have heard of some Indian cargoes being rejected in the past but they are very rare. The sellers normally deliver what's on the contract."

Copyright Reuters, 2011