Rio Tinto sees iron ore price drop, but not 50 percent

By Fayen Wong

PERTH (Reuters) - Iron ore prices are certain to fall in 2009, the first decline in seven years, but not by the 50 percent suggested by some steel makers, Rio Tinto RIO.A (RIO.L) said on Tuesday.

"We need to recognize the fundamentals of the market and the market would show that it does need a downward adjustment this year," Sam Walsh, head of Rio's iron ore division, said on the sidelines of a mining conference on Tuesday.

But given the potential for a recovery in industrial demand at some stage and indications from the spot ore market, prices don't need to halve, Walsh said, breaking a tradition of keeping silent on price issues until talks are concluded.

"If you look at the current spot price it really doesn't verify a 50 percent reduction in prices."

On the spot market, iron ore sells for around $60 a tonne, about $30 under the prevailing term price.

In comments to reporters, Walsh also said a pending deal that would give China's state-owned Chinalco an 18 percent stake in Rio, and holdings in several operations including 15 percent of its Hamersley iron ore mines, would not influence the outcome of the iron ore talks, which include Chinese steel makers.

Rio shares in London fell 2.8 percent to 2,227 pence by 0842 GMT (4 42 a.m. EDT), underperforming a 1.8 percent decline in London-listed mining stocks .FTNMX1770 as copper prices slipped. In Australia, Rio shares had jumped 5.6 percent.

Rio shares, which touched a four-month peak on Monday, have outperformed the index by nearly 30 percent so far this year.

HEADING FOR GLUT

Last year's iron ore talks, which saw prices for some grades almost double, dragged on until the middle of the year, a departure from previous rounds when they typically wrapped up ahead of the April 1 shipping year start.

Speaking earlier at the Global Iron and Steel Forecast conference, Citi Investment Research's global commodity analyst Alan Heap predicted a 50 percent decline in ore prices over the next two years, warning markets were heading for a glut.

Contract iron ore prices may drop 30 percent this year and 20 percent in 2010, Heap said.

Weakness in iron ore prices is being driven by the steepest decline in global steel usage since the end of World War Two.

In the first two months of 2009, global steel production was down nearly 23 percent at 170 million tonnes, according to figures from 66 countries reporting to the World Steel Association.

Andrew Simpson, chairman of Australia's Territory Resources (TTY.AX), which is awaiting the outcome of the talks to determine how much Chinese customers will pay for 2 million tonnes of ore his company has contracted to sell to three mills this year, told Reuters a drop by around 35 percent "seemed fair."