Rio and Japanese mills agreed to cut ore price 13%

Anglo-Australian mining giant Rio Tinto has agreed to a 13 percent cut in fourth quarter iron ore prices with Japan's Kobe Steel Ltd, probably setting a trend the industry will follow.
The deal, expected by the market, could fuel a restocking cycle if other players follow, leading to stronger prices for most of 2011, offsetting the savings of nearly $3 billion in the fourth quarter Chinese buyers might see as a result.
"We have agreed to a 13 percent cut in the price of iron ore for October-December from July-September," Gary Tsuchida, spokesman for Japan's fourth-largest steelmaker, said on Wednesday, although he would not comment on the actual price.
However, a spokesman from another Japanese steelmaker, Sumitomo Metal Industries, said the company had agreed with Rio Tinto on a price of around $127 a tonne, down 16 percent from around $147.00 a tonne paid for the third quarter.
Larger firms Nippon Steel and JFE Steel both declined to comment.
"The deal looks like an average of the June, July and August spot price, and in line with expectations," said Ben Westmore, economist at National Australia Bank.
"On the demand side there it looks like they have steadied. There have been persistent stories about destocking by Chinese mills, part of the broad cycle and nothing to be panicked about."
The destocking cycle would turn around in the fourth quarter, resulting in rising prices in the first nine months of next year and a net rise for 2010 of the order of 7 percent, he added.
Chinese steel production remained brisk in August, but could slow in September after several provinces ordered mills to limit production.
China produced 1.7 million tonnes of crude steel per day in August, data from the China Iron & Steel Association showed, higher than July's daily average of 1.66 million tonnes as a 15 percent rally in prices of products like rebar encouraged output.
CISA data also suggested crude steel production slowed in the last 11 days of August after output in several provinces was affected by reduced electricity supply. But few in the market expect those cutbacks to endure.
CISA fought a bitter rearguard action against the launch of of a more flexible pricing system, instead preferring annual prices, which critics described as a "free put" option for Chinese buyers.
At the height of the economic crisis, spot prices plunged below the annual contract and Chinese mills were quick to defer or default on those higher priced annual tonnages to buy cut price spot material -- a move that dealt a finishing blow to the decades-old system.
Shan Shanghua, the secretary general of CISA, was not available while another senior official, the deputy head, declined to comment on the Rio Tinto price news.
If other miners agree to the same price as Rio and Chinese imports continue at the pace seen in the year so far, China will see its iron ore bill cut by $2.9 billion for the last three months of the year against the third quarter.
Based on Japan's imports of 77.9 million tonnes of iron ore between January and July, the nation's mills could save $626 million in the final three months of the year.
Glyn Lawcock, head of Australian Resources, UBS Securities Australia told Reuters the industry's move to quarterly pricing appeared to be working well, with customers sticking to agreed prices.
Prices would have to fall considerably further to result in output cuts by miners, he added.
"When (iron ore) get down to around $110 a tonne -- if it falls that far -- that provides a bit of a floor because the domestic guys (in China) are starting to get close to a break-even cost position."
"But while we stay above $100 a tonne -- most people in the market use basis $60 a tonne long term -- so, above $100 they are still making a lot of cash."

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