MercoPress. South Atlantic News Agency

Rio Tinto cuts iron ore prices to Japan steelmakers by 33%

Rio Tinto has agreed to cut key iron ore prices to Japanese steelmakers by 33% in this year's first contract setting a benchmark. However China, the world’s leading consumer of iron ore is not expected to accept such a benchmark.

The long overdue settlement by number two iron ore producer Rio Tinto for contracts starting from April was in line with levels that were rumoured last week and will bring some relief to both miners and mills.

They have been in deadlocked talks as demand for both steel and its main raw material, iron ore, has collapsed in the worst recession since World War II, following six years of increasing prices.

But analysts said miners may find it tougher to deal with Chinese firms such as Baosteel, which has typically set the global benchmark, as they have pushed for a 40-50% cut in prices that have roughly quadrupled since 2002.

“They struck the deal with the Japanese first as they realise it will be tougher task with the Chinese, which is a much bigger market -- you could see a further 5-10 percent added to the cut,” said Mark Pervan, head of commodities research at Australia and New Zealand Banking Group in Melbourne.

A senior executive at Maanshan Iron Steel said Chinese steelmakers “should not compromise” on prices: it was hoping for a 40% cut.

If mills in China which imported half of the world traded iron ore last year, break the tradition of following the first deal, it will be yet another crack in the decades-old system of setting iron ore prices on the basis of annual negotiations, a process already under threat from growing spot market trade.

The China Iron & Steel Association, which is leading negotiations on behalf of the country's mills, called an emergency meeting to discuss their response, said one steel industry executive, who did not wait around for the conclusion.

“CISA is in a very tricky position,” he said, adding that China was unlikely to concede to the same terms as the Japanese and that CISA would try to spin out talks as long as possible.“

Analysts said Japan's steelmakers were under more pressure to settle a deal early to fix their budgets, but Chinese mills were more comfortable turning to the spot market when necessary.

”For this year and next, supply of iron ore will outstrip demand and nothing bad will happen if the Chinese side doesn't sign anything,” said Zhang Changan, consultant with World Steel Dynamics in Beijing.