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Annual contract prices thrashed out between the world’s biggest iron ore producers and the giant steel companies who are the biggest users of the commodity provide a window on a bi-lateral monopoly situation which pitches a monopoly supplier with a monopsonistic buyer. The balance of negotiating power in the market sends the contracted price higher or lower demanding on changing supply and demand conditions.

So the news that Rio Tinto’s subsidiary Hammersley Iron has agreed a 33 per cent cut in the annual contract price for iron ore with Japan’s Nippon Steel and with it brought an end to over five years of sustained increases in world iron ore prices is significant.

The Financial Times reports that the lower contract price is the result of a weakening in the pace of industrialisation and urbanisation in the world’s emerging market economies and an economic collapse in Japan. Japan is Rio Tinto’s second biggest iron ore market, taking 50 million tonnes, versus China’s 100 million tonnes; the company says it produced a total of 175 million tonnes of iron ore last year.

“The sharp drop in demand for steel amid the global economic downturn has forced Rio to accept lower prices for its iron ore. China has in recent months pushed for a 40-50 per cent cut, while Rio had been hoping for reductions of closer to 20 per cent.”

Contracts for 2010 will be influenced by the shape of any recovery in the world economy and also by the impact of huge infrastructural spending in many countries. China plans to increase imports of copper, iron ore and aluminium to support the Beijing government’s enormous spending on new infrastructure.

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