^[1]By Kishori Krishnan Exclusive To Iron Investing News

The alarm bells have started ringing. On the sidelines of a mining conference, Rio Tinto ^[2]said iron ore prices are certain to fall in 2009, the first decline in seven years, but not by the 50 per cent suggested by some steel makers. On the spot market, iron ore sells for around $60 a tonne, about $30 under the prevailing term price.

"We need to recognise the fundamentals of the market. The market would show that it does need a downward adjustment this year," said Sam Walsh, head of Rio's iron ore division. But given the potential for a recovery in industrial demand at some stage and indications from the spot ore market, prices don't need to halve, Walsh said, adding: "If you look at the current spot price it really doesn't verify a 50 per cent reduction in prices."

Walsh also said a pending deal that would give China's state-owned Chinalco ^[3] an 18 per cent stake in Rio, and holdings in several operations including 15 per cent of its Hamersley iron ore mines, would not influence the outcome of the iron ore talks, which include Chinese steel makers. Last year's iron ore talks, which saw prices for some grades almost double, dragged on until the middle of the year, a departure from previous rounds when they typically wrapped up ahead of the April 1 shipping year start.

Speaking earlier at the Global Iron and Steel Forecast conference, Citi Investment Research's global commodity analyst Alan Heap predicted a 50 per cent decline in ore prices over the next two years, warning markets were heading for a glut. Contract iron ore prices may drop 30 per cent this year and 20 per cent in 2010, Heap said.

Weakness in iron ore prices is being driven by the steepest decline in global steel usage since the end of World War Two. In the first two months of 2009, global steel production was down nearly 23 per cent at 170 million tonnes, according to figures from 66 countries reporting to the World Steel Association.

Lean years

The annual benchmark price of iron ore is an overlooked gauge of the global economy. Negotiated each year between the world's top iron ore miners and steelmakers, it is a strong indicator of demand for almost anything that requires steel: ships, houses, cars, refrigerators.

Last week it emerged that Rio Tinto, the world's second-biggest iron ore miner, was in talks with Asian steelmakers about cutting its iron ore prices for the contract year starting April 1 by 20 per cent, a target steelmakers view as provisional ^[4]until a permanent settlement can be reached.

The China Iron & Steel Association, representing the world's biggest buyers of iron ore, said some big miners had agreed to provisional iron ore price cuts of 40 per cent, the level demanded by the association.

A 40 per cent price cut, also demanded by Japanese firms including JFE, would be the biggest annual price fall on record and end six consecutive years of price gains that boosted prices nearly five-fold to $91 a tonne. Brazil's Vale, BHP Billiton Ltd and Rio control two thirds of global seaborne trade of the steel-making ingredient. Once the three miners and major steel makers establish a price, it acts as an industry-wide benchmark.

Shopping on

Anglo American Plc ^[5]is looking at possible iron ore joint ventures or acquisition opportunities in Australia, a senior company official said. "Nothing is imminent but we are looking at joint ventures and acquisition opportunities," Paul Caghill, head of group business development for Asia Pacific and Australasia for Anglo American, told Reuters. Earlier this month, the mining giant said it sold its remaining 11.3 per cent stake in South Africa's AngloGold Ashanti for around $1.3 billion.

Speaking on the sidelines of the 5th Annual Asia Mining Congress 2009, Caghill said it was likely to be a very difficult year in the iron ore market, with conditions next year also tough. "Right now there are very difficult price negotiations going on between consumers and producers, which are likely to see a significant reduction in the price of iron ore compared to last year. "

Mongolian iron ore

Some 99.15 tonnes of iron ore from Mongolia are reported to have been  imported on March 27, becoming the first passage of this year there. Staffs in Baotou Entry-Exit Inspection and Quarantine Bureau had checked carefully on those imported iron ore so as to ensure its successful passage.

It is known that more than 250 tonnes Mongolian iron ore had been exported to China in August 2008 for the first time and the volume rocketed to over 700 tonnes in November. In order to enlarge export, one Mongolian company just applied to its related department for temporary one port open to special Chinese enterprises in 2008. Now, the proposal is approved by both countries and it will be effective since April. Thus, around 0.1 million tonnes iron ore is estimated to be imported to China this year.

Australia's gain

In other news, China's iron ore confusion is turning out to be good news for Australia ^[6]. Logic suggests that the dynamics of an iron ore supply glut, a steel industry collapse and a new Team China approach to this year's iron ore benchmark price negotiations would lead China to overturn five years of national humiliation and bring Vale, Rio Tinto and BHP Billiton to their knees. Luckily for Australia, there is little that is logical about iron ore in China.

In February, the China Iron & Steel Association's boss, Shan Shanghua, had inserted his personal representative into the annual price talks for the first time. Shan is best known in Australia for crippling Chinalco's public relations campaign by boasting that the company's investment in Rio Tinto would "break the duopoly in Australian iron ore supply".

Coming down heavily

Australia's third largest iron ore miner, and its chief executive, Andrew Forrest, are being sued by the country's market watchdog for misleading investors on 2004 China deals. According to a Reuters report, the Australian Securities and Investments Commission (ASIC) said it would also ask the courts to consider barring Forrest, the company's billionaire founder, from being a company director.

"We are very conscious that what's been presented has not been supported by the facts and we will defend it vigorously," Executive Director Graeme Rowley told reporters in Melbourne. "We've done a considerable amount of work in preparing for this case and we are going to defend the given allegations."

The ASIC is also seeking fines of up to A$6 million ($4.3 million) against Fortescue and up to A$4.4 million against Forrest, who had turned the company from a speculative penny stock into one of Australia's biggest mining stocks. "It's more about him as an individual than the company," said Steve Robinson, fund manager with Alleron Investment Management, adding that the potential fines were insignificant. "You would have to say, he was the driver of Fortescue," he added.

Forrest was Australia's richest person at the height of the commodities boom last year. He was then worth $7 billion. The former stockbroker carved out his fortune with the help of Chinese firms, which were eager to fund Fortescue and create a rival supplier to Australia's two dominant iron ore miners, Rio Tinto (RIO.AX) (RIO.L) and BHP Billiton (BHP.AX) .

Fake demand

Another allegation of  "fake demand" has also riddled the market. China's iron ore imports surged in February and March because of "fake demand" brought about by stockpiling and they are likely to fall off over the rest of the year, a government has said, setting the cat amongst the pigeons.

"The increase in steel production in January and February didn't lead to an increase in (end-user) demand, but all ended up in inventories," Liang Shuhe, the vice-chairman of the Ministry of Commerce's Foreign Trade Department, told an industry conference in the port city of Tianjin, near Beijing.

In response to the "fake demand" ^[7]at the beginning of the year, China's steel mills and traders made the mistake of increasing their orders for iron ore, leading to record imports in February and March, he said. "In February, some of my foreign contacts told me that China's steel market wasn't doing badly... but (the increase in demand) was actually a sign of weakness," Liang said.