Rio slashes iron ore prices by a third

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The Independent Online

Rio Tinto has agreed to slash its iron prices by a third for Japan's steel mills, putting the miner on a collision course with Chinese customers fighting for a much larger discount.

This year's price talks between the world's steel-makers and the trio of major iron ore producers – Vale, BHP Billiton and Rio – have dragged on far beyond the usual April deadline as the steel mills push for massive reductions in the face of the worst recession for decades. The usual form is for the first negotiated deal to set prices. But Chinese groups, which were demanding cuts of up to 50 per cent, may break with precedent and reject Rio's Japan-brokered 33 per cent price reduction – and with it the benchmark system.

Rapid, wide-scale industrialisation has fuelled quickly inflating iron ore prices. Of the six consecutive years of inflation which have taken the total price to more than four times its original level, the biggest single jump was last year's 85 per cent increase.

China's steel mills consume half of the global iron ore output. And with growing spot markets eroding the traditional dominance of benchmark contracts, China's refusal to accept the Rio deal could be fatal to the system. The situation is further complicated by Rio's attempts to push through a controversial tie-up that would see China's state-owned Chinalco take an 18 per cent stake in the group.

Rumours about changes to the deal have been gathering force, with Rio shareholders in both listing jurisdictions in London and Sydney taking an increasingly vocal stand against the plan. Xiong Weiping, the Chinalco president, told a Chinese magazine the company was discussing changes to the deal.

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