RIO Tinto and steel mills in Japan have settled on a price cut of 13 per cent for iron shipments made between October and December.
The cut follows predictions from Rio's and BHP Billiton's management that prices would fall in the short term because of a temporary drop in demand from China.
It also follows a 7 per cent reduction in coking coal prices that Japan's mills extracted from BHP for the December quarter. The reductions are the first price cuts for both commodities since April 2009.
Japan's Nikkei financial newspaper reported that the December quarter iron ore price struck with Rio would be about $US127 a tonne, compared with $US147 a tonne in the previous quarter. The spot price is about $US150 a tonne.
Similar deals are likely to have been struck with BHP and Brazil's Vale or will be in the near future.
The reduction is a product of the new pricing system where the quarterly price is linked to the average iron spot price in the previous quarter. The spot price dropped in the September quarter as China applied the brakes to its economy to prevent a speculative property bubble.
Nikkei reported that the price changes would reduce the steelmaking sector's materials costs by about Y=70 billion ($915 million), or 11 per cent, for the quarter. Japanese steelmakers and mining companies used to negotiate iron ore and coking coal prices once a year. But they shifted to a quarterly price-setting cycle starting in the June quarter, amid pressure from the major miners as the spot price soared.
The price reductions this quarter give Japanese steel mills, some of whom are unhappy with the quarterly pricing system and the sharp rises it initially brought, some positive news ahead of price negotiations with their customers.
The steelmakers now conduct twice yearly negotiations with some automakers and other customers and were worried about being unable to pass on large price increases for the October to March period.
Rio followed normal practice among the miners and did not comment on the reported price change. But the company's iron ore chief Sam Walsh had flagged the change last week, telling journalists at the opening of the company's Brockman 4 mine in Western Australia's Pilbara region that prices were set to drop. He said the new price came after several quarterly price hikes and reflected a more sustainable level for the iron ore market, which feeds into China's expanding steel industry.
"When you look at the big picture, we'll see very robust demand for iron ore going forward," he said, adding that current prices remained "very attractive" for the miner.
A spokesman for Kobe Steel, Japan's fourth largest steel producer, yesterday confirmed the price cut. "We have received a 13 per cent decrease in our iron ore price from Rio," spokesman Gary Tsuchida said.
He was unable to say whether they expected further price drops.