China and Japan seek a 40 per cent reduction in iron ore costs as demand for steel from construction and industry falls Steel producers are demanding that BHP Billiton and Rio Tinto, the Anglo-Australian miners, cut the price of iron ore by up to 40 per cent after a collapse in demand for metals. Chinese steelmakers joined their counterparts from Japan at the end of last week in urging the miners to cut prices after six consecutive years of gains. Most iron ore sales are negotiated annually with the first miner and steelmaker to agree terms fixing the price for everyone else. Last year the price of iron ore rose by up to 96 per cent for some types of rock, which helped to push up the cost of everything from skyscrapers to cars and fridges. Increased demand for steel, particularly from the Chinese construction industry, has led to a near 500 per cent increase in the cost of iron ore since the start of this decade. One tonne of the rock cost only $26 in 2000 but was fixed at $144 for this year. However, the economic downturn and reduced availability of financing for large real estate projects has caused a sharp reduction in steel sales. The price has fallen by up to 70 per cent in some markets and smelters are demanding that iron ore costs should also fall. The negotiations between steel producers and the miners have already begun and are likely to be concluded in the next couple of months. BHP and Rio both mine iron ore from the Pilbarra region of Western Australia and between them they control about 35 per cent of the global market. Vale, the Brazilian miner, controls about a further 40 per cent of the market. In recent years, the miners have been trying to sell more iron ore at spot prices rather than tying up production in annual contracts. The spot price hit $200 a tonne last year and the miners wanted greater exposure to this higher price. However, the spot price has now fallen back to about $80 a tonne and analysts believe that Rio and BHP will be less vocal this year about wanting to sell ore in the spot market. Charles Cooper, an Evolution Securities metals analyst, said: “Given that all metals prices have fallen off so dramatically in recent months, the miners will have to go back to contracts for the time being. "It is certainly in their interests to do so because contract prices are more robust, which is important in such volatile markets.” Global steel output fell by 19 per cent in November and many companies are cutting production. Corus, the European steel pruducer owned by Tata, of India, said last year that it would cut output by about 20 per cent. Analysts expect most metals to suffer further price falls this year as the global economy continues to slow, although the London Metals Exchange has seen a small rally since the start of this year. Lead, nickel and copper are up by more than 20 per cent, which has been attributed to expected cuts in production rather than to a change of sentiment over demand prospects.

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