Iron ore prices have dropped sharply in the first half of the year despite an increase in crude steel production. High inventories at China's ports of around 100 million tonnes mean iron ore prices will likely continue to trend downward with some fluctuation for the rest of the year, the China Iron and Steel (CISA) tells Kallanish.

China’s imported iron ore prices fell 7.14% over August to $87.28/tonne CIF, while domestic iron ore dropped just 1.13% to Yuan 718.99/t, according to CISA’s own price index.

Slower Chinese economic growth has dampened steel demand, and iron ore demand by implication. Most importantly, China's supply of imported iron ore has been increasing steadily, while its domestic supply is also stronger than expected, considering current price levels.

Port stocks of imported ore actually fell very slightly in August, by 0.95% to 112.37mt. However, these were still up some 7.16mt or 9.2% from the start of the year, CISA notes. Pig iron production increased just 0.4% over the same period to 1.61m t/day.

Weak steel demand had also pushed the country’s finished steel prices to their fifth consecutive month of decline in August, when they dropped 1.36%.

Many steel mills are making losses in their steel operations but are surviving with income from non-steel sectors. Chinese market observers have likened this business model to, "using a straw to breathe underwater during a flood".