* Rio makes deal with Nippon Steel, JFE, Sumitomo Metal
* Agree on 33 pct fines cut, 45 pct for lump
* Deal shifts pressure onto China mills, seeking deeper cut
* Rio shares rise, Nippon Steel softer
* For related news on iron ore talks click [ID:nSP480484]
(Adds ArcelorMittal, updates shares)
By Jonathan Standing
SYDNEY, May 26 (Reuters) - Rio Tinto has agreed to cut key iron ore prices to Japanese steelmakers by a third in this year’s first contract, setting a benchmark analysts say China will almost certainly reject after six years of surging prices.
The long overdue settlement by No.2 iron ore producer Rio RIO.LRIO.AX for contracts starting from April was in line with levels that were rumoured last week and will bring some relief to both miners and mills. They have been in deadlocked talks as demand for both steel and its main raw material, iron ore, has collapsed in the worst recession since World War II.
But analysts said miners may find it tougher to deal with Chinese firms such as Baosteel 600019.SS, which has typically set the global benchmark, as they have pushed for a 40-50 percent cut in prices that have roughly quadrupled since 2002.
Baosteel could not be reached for comment.
“They struck the deal with the Japanese first as they realise it will be tougher task with the Chinese, which is a much bigger market -- you could see a further 5-10 percent added to the cut,” said Mark Pervan, head of commodities research at Australia and New Zealand Banking Group in Melbourne.
If mills in China, which imported half of the world’s traded iron ore last year, break the tradition of following the first deal, it will be yet another crack in the decades-old system of setting iron ore prices on the basis of annual negotiations, a process already under threat from growing spot market trade.
The China Iron & Steel Association, which is leading negotiations on behalf of the country’s mills, called an emergency meeting to discuss their response, said one steel industry executive, who did not wait around for the conclusion.
“CISA is in a very tricky position,” he said, adding that China was unlikely to concede to the same terms as the Japanese and that CISA would try to spin out talks as long as possible.”
Analysts said Japan’s steelmakers were under more pressure to settle a deal early to fix their budgets, but Chinese mills were more comfortable turning to the spot market when necessary.
“For this year and next, supply of iron ore will outstrip demand and nothing bad will happen if the Chinese side doesn’t sign anything,” said Zhang Changan, consultant with World Steel Dynamics in Beijing.
Rio, the world's second-largest producer, agreed to sell its Pilbara and Yandicoogina fine ores to Nippon Steel Corp 5401.T, JFE Holdings Inc 5411.T and Sumitomo Metal Industries Ltd 5405.T at 97 U.S. cents per dry metric tonne unit versus 144.66 cents last year, a reduction of 33 percent.
Higher-quality lump would be sold for 45 percent less. Chinese mills mainly buy iron ore fines.
Analysts said the settlement meant an overall 37 percent price fall for Rio Tinto, based on its mix of rough and fines.
Those prices are still the second-highest on record, in line with higher commodity prices globally, with raw material supplies having been strained by the industrialisation of China.
For a graphic showing Asian iron ore prices since 1992, click: here
EUROPE EXPECTS AT LEAST SAME
Brazil's Vale VALE.N has let the Australian miners take the lead in this year's negotiations after having missed out on last year' peak, settling an early deal at a 71 percent rise.
South Korean POSCO 005490.KS, the world's number four steelmaker, said it was still negotiating with Rio. European steelmakers said they had not agreed any deals.
ArcelorMittal, the world’s largest steelmaker, has said it expects a “substantial” fall in 2009 annual contract prices. It declined to comment on Tuesday’s price setting.
It did note that 60 percent of its iron ore needs now came from its own mines or through longer-term contracts, part of a push towards a goal of around 75 percent. The figure was currently inflated by its present halving of production.
ThyssenKrupp TKAG.DE said it expected to pay more than a third less for iron ore.
Rio and BHP shares in Sydney rose 2.2 percent and 1.2 percent respectively. Rio closed down 0.6 percent in London, while BNP shares there added 1.4 percent.
Stock in Nippon Steel, the world’s second biggest steelmaker, slipped 0.9 percent on the day.
Tough negotiations with Chinese mills would come at a sensitive time for Rio as it tries to sell shareholders on its proposed $19.5 billion tie-up with Chinese state-owned metals firm Chinalco [ALUMI.UL], a deal that critics say would give China too much power over minerals prices.
Chinalco told a magazine it was considering changes to the deal -- which would give Chinalco a stake in assets including Rio’s flagship iron ore operation in western Australia -- while Rio said the deal was “evolving”. [ID:nSYD475535]
Chinalco has said it would not interfere in ore pricing.
For a factbox on global iron ore price forecasts, click on [ID:nSEO368386]
For a factbox on Asian iron ore prices since 1992, click on [ID:nSP361093] (Additional reporting by Denny Thomas, Sonali Paul, Bruce Hextall in Australia, Jonathan Leff in Singapore, Miyoung Kim in Seoul, Alfred Cang, Tom Miles in Beijing, Yuko Inoue in Tokyo, Arno Schuetze in Frankfurt, Philip Blenkinsop in Brussels, Eric Onstad in London; editing by Jonathan Leff and Karen Foster)