The globe's most active steel future – rebar for January delivery – dropped to a record low of Rmb3,308 ($540) per tonne on Monday sending the price of iron ore – a primary steelmaking ingredient – tumbling.

The benchmark import price of 62% iron ore fines at China's Tianjin port dropped 2% to $119.90 a tonne, down 10.6% since the start of the year and the lowest since July.

$120 a tonne has long been considered a price floor for iron ore as many of China's hundreds of small scale miners, which struggle with high costs and very low iron content, quickly become unprofitable at these levels.

The decline in the iron ore price this year comes amid record iron ore imports which have swelled stockpiles at the country's ports to some 107 million tonnes amid declining output and record finished product inventories at the country's steel mills.

The stockpiled iron ore is not being put to industrial use, but because of tight credit conditions inside China the ore is being used as collateral to secure loans.

About 40% of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates, but those loans are now being called in.

Reuters quotes Helen Lau, senior analyst at UOB-Kay Hian Securities in Hong Kong who says a vicious circle has been created in the steel and iron ore industry:

Some mills will have to close down because they can't continue producing as the banks can't give them the cash they need."

"Tighter lending is making markets jittery and will force traders to sell down their inventory to get their cash back. Some mills will have to close down because they can't continue producing as the banks can't give them the cash they need."

One business paper describes lending to China's steel industry as a "black hole" and the deteriorating situation has led to at least one high-profile collapse.

Earlier this month Xiao Jiashou, known as the king of steel trading in the nation's financial capital has had his assets in a steelmaker frozen due to non-performing loans.

Xinhua reports about one-third of China’s 200,000 steel trading firms could collapse as the loan crisis deepens. Loans to the industry peaked around 200 billion yuan or nearly $33 billion following China's economic stimulus program in 2008 following the global financial crisis.

China is responsible for 48% of global steel output and consumes roughly 70% of the world's seaborne iron ore trade of 1.2 billion tonnes.