One of the China's biggest steel producers, Hebei Iron and Steel, has demanded that iron ore prices be slashed by at least 40 per cent this year.
Chinese production is expected to fall this year as exports drop by at least 20 per cent.
Even bigger production cuts are expected by Australia's two other main iron ore markets South Korea and Japan as global demand for steel continues to deteriorate.
China is now the biggest steel maker in the world, with global market share of about 38 per cent.
Benchmark negotiations between Australian miners and Chinese steel producers have become bogged down with the steel prices falling along with the Chinese spot price for iron ore, which has dropped below the benchmark price for the first time in the past few months.
Chinese steel mills remain in talks with BHP Billiton and Rio Tinto, with the China Iron & Steel Association saying yesterday that talks were still going, with a price drop agreed but not its level.
"Chinese steel mills and the three global miners have agreed on an iron ore price drop for 2009," CISA vice-chairman Luo Bingsheng said.
Brazilian firm Vale is not active in the talks but said it was selling its product at 80 per cent of last year's benchmark. Vale vice-president for China Michael Zhu referred to this as a "provisional pricing" plan.
"This is not a discount -- the difference will be returned once the 2009 term price is settled," he told Dow Jones. But Vale has backed out of the talks this year.
"The others can settle it and Vale will take the cue," Mr Zhu said. He said the company would cut output capacity by 25 per cent this year but Chinese mills were pushing for a better price cut.
Hubei Iron & Steel vice-president Tian Zhiping told the Metal Bulletin China Iron Ore conference in Beijing yesterday: "Iron ore suppliers and steel mills are close and irreplaceable partners who will rise and fall together only through mutual support and co-operation can we survive the global crisis together.
"The iron ore price shall go back to the level of 2007, this is a basic condition and the decrease is about 40 per cent or above.
"If we go back to the price of 2007, it's about a 44 per cent drop for Brazil and for Australia it's 44.4 per cent."
Chinese steel companies are suffering from having to pay prices set last year at the very tail of the resources boom and its steel exports have already slumped by 55 per cent for the first months of this year.
A leading Chinese government researcher in the sector called at the conference for the breaking of the benchmark system.
"We need to establish a new benchmark system of iron ore in our favour," Li Xinchuang, a researcher at the China Metallurgy Industry Research and Planning Institute, said.
"The price needs to be firm and stable and the current mechanism is not fair and reasonable.
"The steel industry in China also remains fractured and inefficient and is one of the main targets for industry rationalisation set by the country's leaders as part of it 4 trillion yuan stimulus package designed to boost domestic demand and consumption to help balance the ongoing plunge in demand for its goods," Mr Li said.
"There is irrational industrial distribution and that poses difficulties for the industry."
But despite fragmentation, Deloitte expects the top-five Chinese companies to account for 50 per cent of production by 2020.
A problem for China is that lower spot prices have forced low-grade local iron ore producers out of the market. increasing reliance on better quality ore from Australia and Brazil.
Source: The Australian
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