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By Kishori Krishnan Exclusive To Iron Investing News

It was bound to happen.  Brazilian stocks dropped for the first time in three days, paring their best monthly gain in a year, on concern that the rebound in commodity prices may not be sustainable as the global economic slowdown deepens.

Cia Vale do Rio Doce, (NYSE:RIO) the world’s biggest iron ore miner, slid 1.8 per cent as metal prices dropped.

“There’s been quite a recovery and there’s some fat on certain stocks,” said Eduardo Roche, who helps manage the equivalent of $389 million at Banco Modal SA in Rio de Janeiro. “We have to see how the bailout plans will work in practice. Volatility should continue.”

Dow Jones reported that iron ore producers have agreed to temporarily cut benchmark contract prices by 40 per cent for Chinese steelmakers. The report cited Shan Shanghua, secretary general of the China Iron and Steel Association, from a country where there is no positive news yet.

Chinese industrial companies’ profits dropped for the first time on record, the state statistics bureau said, as the global recession cut demand for exports from the biggest consumer of metals.

The Bloomberg Base Metals 3-Month Price Commodity Index also dropped 2.7 per cent.

But, Rio Tinto (ASX:RIO) helped bolster its shares and that of fellow miners after its finance director said at a mining conference in Singapore that it could reschedule debt and sell more assets if the Chinalco bailout fails. He also reiterated that the company expects a recovery of metals prices in the second half of this year, helped by the various government stimulus packages. This is more optimistic than many recent forecasts and helped inspire the whole sector.

Plan B

In London, Rio Tinto rose 163p to £23.82 on Thursday, after the mining group discussed its Plan B if the controversial $19.5 billion investment by Chinalco fell through. No decision from the Australian regulators is expected until mid-June, but it has caused political problems for Rio and unhappiness among shareholders.

Rio’s finance director said that alternatives to the Chinalco option included selling more assets, rescheduling debt or undertaking a bond or rights issue. On Friday morning, Chinalco said it has secured financing for the Rio Tinto deal. Chinalco said it has raised an amount of US$21 billion through a bank loan. The financing has been arranged by a syndicate of banks led by the China development bank, according to a Reuters report.

The loan arrangement includes a $19.5 billion loan for the transaction and a $1.5 billion standby facility to finance ongoing working capital and other expenditures linked to the deal, Chinalco said. “The commercial terms we have obtained reflect the banks’ confidence in the excellent potential of our partnership with Rio Tinto and in the long-term prospect of the mining industry,” Chinalco President Xiong Weiping said in a statement.

Under the deal, Chinalco would pay $12.3 billion for stakes in Rio’s iron ore, copper and aluminum assets and $7.2 billion for convertible bonds that would double its equity interest in Rio Tinto to 18 per cent. The agreement with Rio required Chinalco to secured funding by the end of March.

Benchmark out?

According to Deutsche Bank AG, the annual iron price benchmark contract system may be scrapped as producers seek individual arrangements. Peter O’Connor analyst of Deutsche said that “The stress on the benchmark system has never been greater. There’s been a 50 per cent increase in spot sales from Australian producers in the past six months as buyers renege on contracts.”

Cia Vale do Rio Doce said last month that it wouldn’t seek to be the price setter this year. Vale has traditionally been the first iron ore supplier to set so called benchmark annual contract prices with steelmakers, establishing the basis for settlements by other miners in the international market.

In mid 2008 after a surge in demand, Australian producers BHP Billiton Limited and Rio Tinto Group achieved price increases of 85 per cent or higher for their ore, exceeding the 65-71 per cent gained by Vale earlier in the year.

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