The price of iron ore fell 4 per cent on Wednesday as global stock markets slipped and traders anticipated a moderation of Chinese steel demand.

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Benchmark Australian ore with 62 per cent iron content was assessed at $84.2 a tonne by the Steel Index, a drop of $3.2. That followed a 6 per cent drop in Chinese iron ore futures in early trading.

The steelmaking ingredient was one of the best-performing commodities last year and rose above $90 a tonne this month, benefiting Rio Tinto, BHP Billiton and Vale SA, the largest producers.

However there are concerns the rally may have reached its limits. Chinese steel mills have been using high-quality ore, which has helped boost benchmark seaborne prices, with the risk they could shift to lower-quality material if their margins start to fall.

Analysts at Goldman Sachs expect steel margins and iron ore prices to remain strong between $80 to $90 until the end of April. But weaker steel demand could prompt a downturn after that, said analyst Amber Cai. China’s steel demand rose about 8 per cent in the first two months of the year.

Higher ore prices could also encourage domestic Chinese production. Historically a price of $74 a tonne for iron ore has been enough to incentivise enough Chinese production to balance the market, said Ms Cai.

“As it currently stands, the profitability of steel mills in China is at near cycle highs, but increasing discounts for low-grade material means . . . incentives to use lower-grade material are growing,” analysts said.

Still, overseas ore producers are confident China’s environmental controls will maintain demand for higher-quality supplies. In February China issued a document requiring about 50 per cent of steel capacity to be shut during the winter in northern cities to reduce air pollution.

Ferrexpo, the London-listed Ukrainian iron ore miner, raised its dividend on Wednesday after cutting it for 2015.

“The strength of the iron ore market is supported by fundamentals. We have got high port stocks [in China] but it’s low-grade iron ore,” said Chris Mawe, Ferrexpo’s chief financial officer.