The iron ore price fell for the fourth straight day, down 2.2 per cent overnight on Thursday, showing signs that its recent rally is weakening as Chinese steel prices fall to record lows on weak demand.

The benchmark iron ore price for immediate delivery to Qingdao port in China has fallen 6.2 per cent to $US61.51 a tonne from last week's high of $US65.61.

Westpac economist Robert Rennie said Chinese rebar prices had more of an effect on iron ore than iron ore on rebar, and that relationship had diverged in May when iron ore rallied 12 per cent while steel prices fell as construction activity in China slowed.

"There is a robust long-term relationship between rebar and iron ore, and we should expect in the fullness of time that this relationship should continue," he said.

"I sense that the continued slump in Chinese rebar prices will drive iron prices lower once additional supply enters the market later this year."

Chinese rebar fell 0.9 per cent over the past week, after data released last week revealed a decline in China's daily steel production of 2.2 per cent, from 1.81 million tonnes (mt) at the start of May to 1.77mt by month's end.

"While iron ore prices have strengthened in recent weeks, we do not believe the rally is sustainable without improved steel fundamentals," RBC Capital Markets analyst Fraser Phillips wrote in a note.

'SENTIMENT BECOMING MORE NEGATIVE'

Macquarie Capital Securities analysts led by Graeme Train noted that in its June steel sector survey, "sentiment is becoming more negative as orders decline and profitability stagnates".

"Infrastructure orders are the only positive, with most other sectors turning down and, as demand fades, steel inventory has stopped falling – unusual for the time of year," he said.

National Australia Bank senior economist for Asia, Gerard Burg, said with the current supply and demand dynamics, the bank believed $US60 a tonne was a fair price for iron ore and the retraction of the past few sessions may be returning to a balance.

But he said it was difficult to predict a highly state-controlled industry in light of the weaker demand.

"It is a major employer and also steel mills provide a lot of social services to their communities, so from an economical point of view it is difficult to shut them down," Mr Burg said.

Further weakness in the spot benchmark may be ahead as Chinese iron ore futures dropped again on Thursday after sliding 4 per cent to touch their downside limit on Wednesday. The most traded September iron ore contract on the Dalian Commodity Exchange fell as far as 423.50 yuan ($US68) a tonne, its lowest since May 29. It was down 0.5 per cent at 427.50 yuan in afternoon trade.

Chinese steel futures remained near record lows, with the most active October rebar on the Shanghai Futures Exchange touching 2222 yuan a tonne.

Taking a lead from some high-cost American and African producers, which have recently pulled out of the market, there was the potential for Australian iron ore producers to reach a pullback point sometime this year, Mr Burg said.