Iron ore supply was the key driver behind price movements in the first half of the year but weak steel demand is now coming to prominence, according to the latest report from Macquarie Research. Weak demand from the slowing construction sector is now adding pressure all along the supply chain, including on iron ore, and steel mills could cut production in the coming month, the analyst adds.

Iron ore could be further impacted by a “flush-out” of inventory as mills reduce buying. In addition to mill inventories, trader iron ore inventories could also be reduced as days of combined inventory at mills and traders is much higher than the lead time on spot cargoes, Macquarie argues.

The core problem in September has been that orders have fallen at both mills and traders. Construction orders are continuing to decline while demand from infrastructure has also now turned negative, according to Macquarie’s steel survey.

Mills are seeing a sharper slowdown in orders as traders attempt to minimise risk in the downturn by reducing inventory. As a result many plan to cut production in October compared to September, the survey suggests.

September steel production has remained strong, as evidenced by the latest China Iron and Steel Association statistics, Kallanish notes. Major mills produced 1.79 million tonnes/day of crude steel over 11-20 September, down just 0.45% from the previous ten days.