Shanghai steel futures fell for a third straight session to trade near record lows on Monday, pressured by a sluggish outlook for demand in top consumer China, whose economic growth eased in the last quarter of 2013.
Dalian iron ore futures dropped nearly 2 percent to their weakest level since contracts were launched in October, with losses in Chinese equities also weighing on commodities amid jitters over tight liquidity.
China's gross domestic product rose 7.7 percent in October-December, slower than the 7.8 percent pace in the third quarter, as investment growth eased. Analysts say it could cool further in 2014 as Beijing focuses on rebalancing the economy.
The most-traded rebar contract for May delivery on the Shanghai Futures Exchange touched a session low of 3,446 yuan ($570) a tonne, within striking distance of a record trough of 3,441 yuan reached on Jan. 10. It closed 0.4 percent lower at 3,451 yuan.
"If the diversification in China's economy continues away from investment and into consumption, growth in steel demand will be slower in 2014 compared to 2013," said Helen Lau, senior analyst at UOB-Kay Hian Securities in Hong Kong.
Lau sees crude steel demand in China rising by 4.4 percent this year versus an estimated 7.5 percent increase in 2013.
China is opting for a more sustainable consumption-driven economic growth after 30 years of double-digit expansion spurred by investment.
Lau said she expects a seasonal rebound in steel prices after a week-long Lunar New Year break that starts on Jan. 31, but adds that any restocking by traders is unlikely to be aggressive.
"China's lack of liquidity and negative Beijing growth messages continue to weigh on investor sentiment and, until we see a change in messaging, we do not expect to see any steel or iron ore restocking despite the overwhelming likelihood that March construction numbers should be stronger," Standard Bank analyst Melinda Moore said in a note.
Overcapacity in the steel sector in China which has kept the market mostly in surplus of the alloy has also weighed on prices.
Crude steel output rose 6.5 percent from a year ago to 62.35 million tonnes in December, putting the country's production at a record 775.21 million tonnes for all of 2013.
The weakness in steel is helping drag down prices of raw material iron ore with mills in no rush to replenish inventories ahead of the Chinese New Year.
Iron ore for immediate delivery to China .IO62-CNI=SI fell 0.8 percent to $127.30 a tonne on Friday, its lowest since July 15, according to data compiled by Steel Index.
The price dropped 2.6 percent last week, its second consecutive weekly fall. Declining steel prices suggest further downside risks for iron ore in the current quarter, Australia and New Zealand Banking Group said.
"Any restocking activity before the break from China is not expected to be from sea-borne cargoes but rather sourced from port stockpiles, which remain at a 13-month high of 85 million tonnes," ANZ said in a note.
At the Dalian Commodity Exchange, the most-active iron ore May contract dropped 1.5 percent to settle at 861 yuan a tonne, after falling to as low as 859 yuan, its cheapest since the contract was introduced on Oct. 18.