Rio Tinto Heats Up Iron Ore Price Negotiations

U.K./Australian-based miner Rio Tinto (RTP) has agreed to a 33% cut in contract prices in iron ore with Japanese steel makers including Nippon Steel Corp. and JFE Steel Corp., the first decline in seven years.

Historically, Chinese steel makers -- typically responsible for 45% - 50% of global steel production in 2009F -- accept the price set with the Japanese, but they may be looking for more aggressive levels.

This news clearly also affects Companhia Vale do Rio Doce (VALE), BHP Billiton (BHP) and other major iron ore producers. Vale will seek better prices than RTP, according to mining analysts.

RTP is still looking for alternatives to the Aluminum Corp. of China/Chinalco (ACH) deal to improve its balance sheet. Chinalco is also reportedly looking at a modified deal, which is proposed as buying $12.3 billion in asset stakes and paying $7.2 billion dollars for bonds later convertible to shares in the company.

We would argue selling a piece of the company to Chinalco is akin to doing a deal with the devil.

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