Robust steel demand in China led Australia to post a record $5.9 billion in iron ore exports and the second highest trade surplus in July, according to figures that were released yesterday.

Chinese spot prices remain stable and high, above $US171 a tonne for 62 per cent iron ore, and Australian producers have mostly locked in high prices until the end of this year.

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But this might be as good as it gets because steel producers are cutting prices and market sentiment is rapidly deteriorating, analysts say.

The steel and iron ore markets were bracing for "volatility on a declining trend", said Yin Jimei, an analyst at Iron & Steel Information Website in Tangshan.

An analyst from a Shanghai-based consultancy, said market anxieties over the global economy have coincided with softening domestic demand including a decline in railway construction due to a series of scandals in the Ministry of Railways.

"Capacity utilisation is on a downward trend because demand and prices are falling, and prices for raw materials are high," He said.

Typically, iron ore prices follow steel prices, and the analyst expected both to soften after China's current Golden Week holidays.

Prices for "rebar" construction steel fell 2.6 per cent last week and they have dropped 8 per cent since mid-August, said Paul Bartholomew at Steel Business Briefing.

Sliding prices are squeezing steel mill profit margins and putting pressure on resource suppliers to cut prices as well.

The Baosteel chairman, Xu Lejiang, said last week that steel was the least profitable sector in Chinese manufacturing, with margins less than 3 per cent.

"Steel mills are restructuring and it is possible that we'll see steel mill bankruptcies in the near future," Ms Yin said. "Iron ore prices are likely to fall."

Australia's iron ore miners may get a reprieve, however, if softening Chinese iron ore demand is offset by deepening restrictions on Indian iron ore exports over the next six months, as some analysts expect.

The Chinese construction sector is showing signs of slowing, thanks to government policies to control inflation and real estate speculation.

Dragonomics, a Beijing consultancy, said real estate data was now a better guide to activity than construction data.

"Some questions arise from the apparent disparity between the reported volume of floor space under construction, which is up 30 per cent this year, and property sales, which are up only 13 per cent," it said. "The sharp rise in new construction is likely a mirage."

Investors are hoping that a "social housing" program will offset a slowdown in the private sector real estate market.

Last week, the State Council issued fresh directives showing that its target of building 10 million homes this year remained at the top of the policy agenda.

The Chinese economy has eased in recent months but has now stabilised, according to the HSBC Purchasing Managers Index.

Source: Sydney Morning Herald