China’s steel producers will demand price cuts of around 40% for Brazilian and Australian iron ore to be delivered starting April, according to a Chinese newspaper report, but analysts doubt prices will drop that much.

“The bottom line for Chinese steel mills is for iron ore prices to drop to the levels between 2007 and 2008, meaning Brazilian miners must cut iron ore price by at least 39 percent and their Australian counterparts by at least 45%,” the official Shanghai Securities News said on Friday, quoting unnamed industry sources.

The China Iron and Steel Association could not be reached immediately for comment.

Iron ore major BHP Billiton and Rio Tinto declined to comment on the report.

Spokesman for both groups said it was company policy not to discuss price negotiations.

Negotiations informally began late last year but have stepped up with China’s steel mills likely to push for an early settlement because of signs of a recovery in prices.

“It’s early days and they’re probably being opportunistic on the back of the iron ore price weakness pre-Christmas,” said James Wilson, an analyst at Perth stockbroking firm DJ Carmichael.

“They’re trying to lock in prices while they can but I think they will find they won’t be able to do that. I don’t see a 45% reduction happening.”

Spot iron ore prices plunged 70% from highs, or nearly $US200 per tonne, last February to $US60 a tonne in October but have since recovered to about $US80 a tonne.

The recovery has been linked to expected improved demand for steel in China due to the government’s $US586 billion stimulus package heavy on large infrastructure projects to boost the economy.

“All of that points to a positive industry,” said Wilson.

His firm expects a 20% plus cut in benchmark contract prices which last year rose 80% for iron ore fines.

Goldman Sachs JBWere analyst Malcolm Southwood in a research report this week forecast a 30% fall in prices as steel mills around the world had cut back production.

He said the iron ore market would remain in notional oversupply in 2009, making cuts in contract prices inevitable.

Analysts and traders have warned that the current price recovery in steel may end soon as key buyers such as automakers halt production due to shrinking demand.

“So far, what is absent is a significant recovery in end-use steel consumption. Steel traders are buying again after having destocked heavily and are speculating on a short-term price recovery,” said Jim Lennon at Macquarie in a note to clients.

“As supplies of iron ore recover (from Brazil, Australia and India), this may also cap iron ore spot prices.”

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