Chinese steel mills are about to turn the tables on Australia by demanding a 40 per cent price cut in the price of iron ore shipped from the Pilbara.

A weekend report from the 120-year-old New York-based minerals and energy news service, Platts, says the steel makers are demanding Australian iron ore producers not only swallow the price medicine but agree that contract prices for iron ore be revised four times a year rather than once.

And they want the new regime starting 12 days ago, on January 1, rather than the normal April 1 kick-off for new contracts.

The Platts report will raise fears here that Chinese steel makers, who were held over a barrel for four consecutive years and had to accept huge price rises, are now seeing the global downturn as a means to exact payback from the miners.

Last year they had to watch the contract price of iron ore jump from $US52 to $US90 a tonne, the latter nominally lasting until April this year.

The demands come at a time when there is sharply divided opinion on when there will be a bounce in global demand for iron ore, raising the prospect that Australian companies could be forced to take a savage price cut and then have demand roar back.

But the Chinese can point to their growing iron ore stockpiles — 90 million tonnes held at ports, 30 million tonnes with steel makers and 100 million tonnes held by traders.

Platts says the Chinese, led by the giant Baosteel company, want to wipe out almost all last year’s price increases.

Should Baosteel succeed, it will be the first reversal for the miners after a 71 per cent price increase in 2005 kicked off four years of double-digit rises in prices set by long-term contracts.

However, Platts reports that its Beijing source said Baosteel would be offering $US50.80 a tonne for iron ore fines from Hamersley (one of the benchmark rates). This would still be above the 2007-8 contract fines price of $US47.10/tonne and would be seen as a return to more sober levels of metals pricing rather than a devastating blow to balance sheets. Hamersley is a Rio Tinto subsidiary.

The report said the Chinese would expect the 40 per cent drop from all suppliers, which would include Brazil’s Vale do Rio Doce, but the news was notable for including the phrase that the concessions would be sought “especially from Australian ore suppliers”.

The other big change the Chinese will ask for is for price settlements on a quarterly basis.

This would be a change from the long-time practice of fixing contract prices once a year, a system the Chinese clearly feel has left them too little flexibility.

The underlying dissatisfaction is also shown in the report when it quotes a Baosteel source stating China is still concerned about the ability of the big three — Rio, BHP Billiton and Vale — to influence prices.

This concern has been the trigger for the concerted wave of investment by Chinese steel makers in smaller emerging iron ore producers in Western Australia and South Australia.

The Chinese move comes against a background of withering iron ore and steel demand, particularly in Asia.

NMDC, India’s largest iron ore producer, reported that sales fell in December for the third straight month. Last month’s ore shipments were down 35 per cent, and that followed a 65 per cent cut in November.

The news from the Asian steel industry has been bleak in recent weeks. South Korea’s Posco last month announced it would cut steel output by 200,000 tonnes in December and by 370,000 tonnes in January — and then last week indicated that further reductions were being considered.

Thailand’s largest steel maker is closing for a month, Japan’s JFE Steel is slashing output by 26 per cent over the next three months and Russian steelmaker Mechel has announced it will cut production by at least 20 per cent this year.

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