Spot iron ore prices fell nearly 4 percent in their biggest single-day drop since August 2009 as thin demand from top buyer China forced some traders to sell at a loss as offers dropped further on Tuesday.

Iron ore prices have shed 19 percent so far this month, the steepest monthly decline since October 2008, in a sell-off largely fueled by slower construction steel demand in China.

Rio Tinto, the world’s No. 2 iron ore miner, said a strategy by bigger rival Vale to divert European shipments to China led to a rapid drop in prices.

“The softening in iron ore prices relates to Vale shipping material that was destined for Europe into China,” Sam Walsh, head of Rio Tinto’s iron ore division, told a business forum in Perth on Tuesday.

There have been a lot of distressed cargoes in the spot market, or shipments that traders needed to sell because they don’t have enough funds to hold them and wait for prices to recover, said a Singapore-based iron ore trader.

“Traders who can’t hold positions because they don’t have sufficient funding are selling at a loss of $40-$45 a tonne,” the trader said.

“The situation is still very bad. There are some mills which are starting to buy but they’re only willing to pay a very low price, even lower than the current spot market rate,” said a physical iron ore trader in Shanghai.

Some Chinese mills are only willing to buy Australian Pilbara iron ore fines at $125-$130 a tonne, below some traders’ offers of between $132 and $135, he said.

“It’s a bit surprising that some traders are willing to sell their cargo at lower prices. Maybe it’s because of the tight liquidity, they need to sell the cargo to get cash,” the Shanghai trader said.

China has kept a tight rein on its monetary policy, having raised interest rates and banks’ reserve requirements repeatedly to tame inflation.

MORE ROOM TO FALL

Australian 61.5-percent grade Pilbara fines were quoted in China at $134-$136 a tonne, including freight, on Tuesday, down $4 from Monday, Chinese consultancy Umetal said.

Offers for Australian 58-grade Yandi fines dropped $8 to $114-$116 a tonne, and Indian 63.5/63-grade fines fell $4 to $146-$148, Umetal said.

Iron ore with 62 percent iron content slid 3.8 percent to $138.50 a tonne on Monday, according to Platts IODBZ00-PLT, the lowest level since September 2010.

It was the biggest percentage drop since Aug. 27, 2009, when it fell 5.2 percent.

“There’s probably more room to fall, maybe another $10-15 to go, $20 in a real worst case scenario, as the market tends to overshoot in these kind of situations,” said Gavin Montgomery, iron ore analyst at Wood Mackenzie, referring to the 62-percent grade iron ore.

The rapid drop in prices in the past two weeks prompted iron ore miners to tweak long-term contract rates for Chinese clients to reflect falling spot rates.

But Japanese steelmakers JFE Holdings Inc and Sumitomo Metal Industries Ltd said they would not cancel their October-December iron ore contracts.

“It is against our creed that we break contracts and shift to spot buying when the market is not good. We believe that raw materials costs should remain stable,” Eiji Hayashida, president of JFE and chairman of the Japan Iron and Steel Federation, told a news conference in Tokyo on Tuesday.

A decline in China’s steel futures on Tuesday, after two sessions of gains, suggested more losses may be in store for iron ore prices.

The most-traded January rebar contract on the Shanghai Futures Exchange fell 1.1 percent to close at 4,021 yuan a tonne, erasing early gains. (Editing by Michael Urquhart)