Chinese steel mills and traders holding iron ore as collateral for financing deals are scrambling to sell it to pay off loans, traders said. Iron ore has lost more than 20% of its value so far this year.

Shanghai steel futures dropped for a fourth day to near record lows, a day after spot iron ore prices plunged the most since 2009 amid signs of an economic slowdown in China, which buys two-thirds of the world's seaborne iron ore.

About 25% to 30% of all iron ore stockpiled at major Chinese ports is tied to financing deals and owners of those cargoes were rushing to liquidate them to repay loans to banks, traders told Reuters.

The inventory of imported iron ore at the ports stood at a record high of 105 million tonnes last week, according to industry consultancy Steelhome.

The increasing use of iron ore for financing had been used as an explanation for why China had been maintaining its insatiable hunger for the raw material even as an economic slowdown threatens to hit steel demand.

Iron Ore Deliveries

Chinese steel mills and traders were also seeking to defer delivery of iron ore cargoes, traders added.

However, major iron ore producers Rio Tinto and BHP Billiton said they had not noticed any postponement or cancellation of shipments.

BHP Billiton's iron ore division head Jimmy Wilson, speaking at an iron ore conference in Australia, said there had been no defaults on shipments arising from the corrosion in prices.

"Steel mills and traders are telling BHP and Rio Tinto to delay their shipment from April to May. The reason is all their financing is stuck at the port so they can't open new letters of credit," said an iron ore trader in Singapore. The shipments involved around two million tonnes of iron ore, the trader added.

"Anybody who has a cargo in hand is in panic mode at the moment," said a trader in Shanghai.

Andrew Harding, Rio Tinto's head of iron ore, said at the same conference: "We have not seen any deferrals of shipments."

Ore Prices Drop

Iron ore entered bear market territory on 10 March after an 8.3% drop in prices to $104.70 a dry ton - the steepest fall since August 2009 - brought its year-to-date loss to about 22%.

Ore prices were pulled down on concerns over the prospect of weakening steel demand in China, triggered by news that the nation's trade balance had swung into deficit. Data from China showed that exports surprisingly dropped 18% year-on-year in February.

China consumes 60% of the world's iron ore. Any rebound in prices would be hinged on how the world's second largest economy performs. China's property market is an important driver of iron ore prices with 45% of the nation's steel going into the realty sector.