Chinese steel and iron ore futures fell for a second session as demand for the commodities turned tepid ahead of the Lunar New Year holiday late next week.

Iron ore dropped from a three-year high reached on Wednesday and traders say that could pull down bids for physical cargoes in the spot market as restocking appetite wanes.

The most-active iron ore on the Dalian Commodity Exchange closed down 0.8 per cent at 637 yuan ($US93) a tonne, after peaking at 666 yuan in the prior session.

Rebar on the Shanghai Futures Exchange eased 0.9 per cent to 3256 yuan per tonne, slipping further from Monday's one-month peak of 3418 yuan.

China's renewed campaign to cut excess capacity, targeting producers of substandard steel, has fuelled another rally in steel prices this year after sharp gains in 2016. That has pulled iron ore prices higher, even outpacing steel.

"We didn't feel the excitement of the market when it went up sharply this week," said a Shanghai-based iron ore trader, citing few spot deals with most mills having replenished stockpiles ahead of the week-long Spring Festival break that starts on January 27.

Iron ore inventory at China's ports stood at 118.15 million tonnes on January 13, the most since 2004, according to data tracked by SteelHome.

"I think people were a little bit too optimistic about steel demand. From what I heard in the Tangshan steel market, even though they were quoting higher prices, trading activity was not so great and somebody was talking about how difficult it still was to sell steel products," the trader said.

The rapid spike in steel and iron ore futures this week suggested speculative investors took advantage of upbeat sentiment for the sector to raise bets in these commodities as they did last year. China's exchanges later hiked trading fees to tame the wild price swings.

Iron ore for delivery to China's Qingdao port slid 1.3 per cent to $US80.99 a tonne, according to Metal Bulletin, down from Monday's two-year high of $US83.65.

In company news overnight, BHP Billiton and Brazilian miner Vale have struck a preliminary agreement with Brazilian prosecutors, which lays out a path for a future settlement of the largest legal claim eminating from the Samarco dam disaster.