--Spot prices for steelmaking ingredient fall to lowest since December 2009

--Iron ore supply outstrips demand, Brazilian mining institute says

--Europe's weak steel market contributory factor -the Steel Index

By Diana Kinch

RIO DE JANEIRO--Spot market iron ore prices fell again Wednesday despite news that steel production in China, the biggest iron ore-consuming nation, continued to rise in early August.

The price for iron ore fines, a standard industry product, with 62% iron content slid to $104 a metric ton for delivery into China, London price provider the Steel Index, or TSI, reported. This was down from $106 on Tuesday, and was the lowest since December 2009, when the market slumped due to the global economic crisis.

Chinese steel output, normally considered the barometer for ore prices, however rose 1.05% on an average daily basis in the first 10 days of August, according to Chinese data.

Iron ore spot market prices have declined consistently in recent weeks, from a 2012 peak of $149 a ton in April, due to high inventories of the steelmaking raw material at Chinese steel mills, some of which are taking advantage of slower steel market growth to carry out maintenance stops.

World steel output has declined in two of the last three months, mainly due to lower European production, while iron ore output has grown in Australia and Brazil, the two major exporting nations, following climatic problems that curbed production early in the year.

"There's more supply than demand," said Cinthia Rodrigues, economic data manager at Brazilian mining institute Ibram. "There's capacity coming on stream which may not be viable at current price levels."

Analysts and directors of Brazilian mining company Vale (VALE, VALE5.BR) said in May they viewed $120 a ton as a "floor" for spot iron ore prices as some Chinese mining companies are unable to produce profitably at below that price level.

In addition to higher exports from Australia, Brazil, other Latin American countries and Africa, the lifting of a ban on iron ore production from Karnataka in India, which typically increases its ore exports after the monsoon season, has also played a role in pricing, Barclays Capital said in a research report Wednesday. The change in Indian strategy with the Karnataka restart poses a "medium-term supply risk," which is cutting into margins according to Barclays analyst Leonardo Correa.

A dose of negative sentiment, stemming from concerns over Chinese economic growth and the European crisis, has also weighed heavily on ore prices, which have sunk to below analysts' expectations. The soft European steel market is a factor in market attitude, as well as Chinese steel coil export prices, which recently collapsed to a 30-month low, according to TSI steel analyst Vaseem Karbhari. The analyst noted in a recent report that European steel coil prices have been declining since April and the current situation is exacerbated by the holiday season, but that "an August recovery seems unlikely."

For Ibram's Ms. Rodrigues, the current weakness in the iron ore market "is more than anything a reflection of the European crisis."

However, Ms. Rodrigues notes that market analysts haven't yet revised downward their expectations for average annual spot iron ore prices of around $150 to $160 a ton this year, which indicates prices are expected to recover. "We could see an upturn in 30 to 40 days, especially if we get positive economic news from Europe," she said.

Iron ore prices plunged from a peak of $181 a ton in early September 2011 after the government in China, which consumes over 60% of the world's entire iron ore supplies, introduced measures to curb credit amid inflationary fear as the property market overheated. This put "an enormous brake" on the construction industry, directly affecting the steel and iron ore sectors, Goldman Sachs analyst Marcelo Aguiar said in May.

Average iron ore prices this year will work out to be lower than the $168 a ton of 2011, TSI said.

Write to Diana Kinch at diana.kinch@dowjones.com

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