Iron ore fell to its lowest level in 20 months on Friday after bearish signs from the Chinese steel industry and persistent concerns about rising supplies.

Benchmark 62 per cent iron ore, as assessed by The Steel Index, fell 2 per cent to $100.7 a tonne – the lowest level since September 2012 – while iron ore futures also sank.

The June contract for 62 per cent ore on the Singapore Exchange fell 1.6 per cent to $100.65 – the lowest price for a front month contract since April 2013.

The main ingredient in steelmaking, iron ore is crucial to the profits of major mining companies such as Rio Tinto, Vale and BHP Billiton.

Fears of a mismatch between supply and demand and slowing industrial growth in China have had a significant impact on the value of iron ore. The price has fallen 17.7 per cent over the past year.

China consumes about two-thirds of the world’s iron ore, much of which is mined in Australia.

Chinese steel prices also dropped. Rebar for October delivery on the Shanghai Futures Exchange closed down 2 per cent at Rmb3,090 ($496) a ton.

The price fall came as production increased. Steelmakers in China produced a record 1.824m tons of crude steel in the first 10 days of May – up 1.57 per cent on the preceding 10-day period, according to the China Iron and Steel Association.

“If Chinese steel production hadn’t been this high, the price would have fallen even more than it has,” said Colin Hamilton, head of commodities research at Macquarie. “At the moment people are holding enough iron ore for current production and future growth, but if expectations come down they’ll hold less iron ore and take less from the market.”

Last night Macquarie, one of the most accurate predictors of iron ore’s price over the past year, dramatically cut its estimate for the average price of the raw material for the third quarter to $100 a tonne, down from previous forecasts of about $115.

Falling steel prices are also putting pressure on Chinese steel mills.

“The steel sector is in a financial mess, with both private mills and state-owned enterprises struggling to generate positive cash flow. Credit is extremely tight,” wrote analysts from Credit Suisse in a report published this week. “Meanwhile, China’s domestic iron ore sector is now being savaged by lower-cost, abundant imports.”

Elsewhere in commodities, nickel regained its poise after several days of heavy losses. After plunging 11 per cent over the previous two sessions, nickel prices climbed 2.6 per cent to $19,112 a tonne. However, the metal, which is used to make stainless steel, is still up 37 per cent this year. The gains follow Indonesia’s decision to ban the export of nickel ores.