Shanghai | China's steel sector has come back to reality and dragged the iron ore price down with it.
After two months of resurgent production and prices on the back of expectations the Chinese government would unleash a big spending program to support growth, steel mills pulled back in   May. 
The official Purchasing Managers' Index (PMI) for the steel sector fell to 50.9 last month, from 57.3 in   April, the first drop in six months, according to figures released by the China Federation of Logistics & Purchasing. Both steel output and new orders decreased, suggesting the weaker demand will carry on into   June.
The poor result has been reflected in the steel price, which slumped more than 20 per cent in   May, the second biggest drop on record. The largest monthly drop in prices was reported in   October 2008.
Iron ore prices have been falling in line with the steel sector's recent woes as hopes of a big stimulus push failed to materialise. The price of ore with 62 per cent content has fallen 29 per cent since reaching more than $US70 on   April 21, according to Metal Bulletin.
Research group Mysteel analyst Xu Xiangchun said the latest activity report was evidence of a "correction" in China's steel sector.
On Mysteel's own numbers the steel PMI fell to 47.5 in   May, down from 55.2 in   April and 53.7 in   March. It is now back near the   February level of 45.2, based on the group's research.
"We expect steel production and new orders in steel will see a further drop in   June," Mr Xu said.
Speculation of renewed efforts by the government to boost growth along with record credit growth and a resurgent property market in the first quarter revived manufacturing activity in   March and   April.
The apparent stimulus push lifted steel prices and prompted mills to reopen furnaces. It also resulted in investors piling into the commodities futures market, pushing up both steel and iron ore prices even further.
Despite, the reality check for steel mills, activity across the manufacturing sector held up reasonably well in   May. The official PMI for the whole sector was unchanged at 50.1, better than expectations.