Iron ore suffered its biggest one day percentage drop since March, falling by more than 5 per cent, as shipments of the steelmaking ingredient heading to China continued to pick-up.

Iron ore was one of the top performing commodities in the second quarter rising more than 20 per cent. One trigger for the rally was a late buying spree by Chinese steel producers ahead of the peak summer demand period. But another factor was lower than expected volumes from Australia.

Analysts believe a prolonged wet season in the Pilbara region of Western Australia affected output, in particular at mines owned by Rio Tinto, the world’s second-biggest producer of iron ore.

However, shipments from Australia and also Brazil, another major supplier, have started to increase as the weather improved. They hit 25m tonnes last week and are expected to reach the same level this week.

This, and a further decline in Shanghai Rebar futures — a steel product widely used in construction — triggered Thursday’s sell-off, traders said.

Benchmark Australian ore fell $3.10 to $55.80 a tonne, according to a price assessment from The Steel Index, as rebar hit a record low of $336.67 a tonne.

“The physical iron ore market has looked out of whack with Chinese steel prices and the futures market for some time. This was inevitable,” said one trader.

Indeed, analysts have been warning for some time that the recovery in prices from a six-year low of less than $47 a tonne in April to $65 last month was unsustainable. Most say the outlook is bleak with fresh supplies on the horizon from Rio and rivals BHP Billiton and Vale.

“While iron ore has rebounded from its recent lows given supply constraints from major producers, low inventory levels and increased demand from China, we see iron ore prices correcting in the near term as incremental supply comes to market in the second half of the year,” said Michael Widmer, analyst at BofA Merrill Lynch.

On the demand side of the equation, the latest manufacturing data has also given market participants food for thought. China’s steel purchasing managers’ index hit a six-and-a-half year low in June. China is the world’s biggest steel producer and consumes about half of the world’s seaborne iron ore.

But at an event in London on Wednesday night, Sam Walsh, the chief executive of Rio, struck a more upbeat tone.

“I’m far more positive about the second half in China than a lot of the industry is,” Mr Walsh said at a Melbourne Mining Club dinner at Lords cricket ground.

Rio and BHP have been accused by rivals of flooding the market with iron ore and driving prices lower. However, Mr Walsh warned governments not to be tempted by protectionism as they try to preserve revenues at a time of weakening commodity prices.

“In times of economic uncertainty, it might sound seductive or comforting to want to put up the barriers, but we must keep markets and trade open,” he said at the dinner.

Iron ore has fallen 42 per cent over the past year.