JOHANNESBURG (miningweekly.com) – A settlement between Rio Tinto and Japanese steelmakers to cut iron-ore prices by one-third might not bode well for South African producer Kumba Iron Ore (KIO) when it negotiates prices with its customers later in the year, analysts said on Wednesday.

The world’s top-three iron-ore producers – Vale, Rio Tinto and BHP Billiton – lead negotiations with steel manufacturers every year, and Vestact director Sasha Naryshkine said that smaller producers, such as KIO, were likely to ‘piggyback’ off the benchmark prices set by these negotiations.

Rio Tinto agreed on Tuesday to cut prices for fines by 33% and lump prices by 45% in this year’s first contract.

Nedcor securities analyst Johan Pretorius said about 60% of KIO’s iron-ore production was made up of lump iron-ore, with fine ore making up the balance.

“In other words, the price cut for KIO over its basket of products would be closer to 40%. The bottom line is that KIO would be more negatively influenced by this price cut than say BHP Billiton or Rio Tinto, which only produced about 40% lump,” he said in an interview.

Meanwhile, Pretorius noted that the market, in general, was likely to see the 33% cut in fine prices as a positive sign, as it was initially thought the price would be cut by about 40%.

Nedcor Securities had estimated that the prices would be reduced by 55%.

The first contract settlement usually sets the benchmark for other contracts, but the China Iron and Steel Association has reportedly said that it would reject the price settlement, standing firm on a price cut of 40% or more.

Asian steelmakers are under increased pressure from struggling automotive firms and other manufacturing companies to lower prices.

However, Pretorius questioned whether Chinese steelmakers would succeed in negotiating a 40% to 45% reduction.

“If history is anything to go by, chances are that the Chinese would most likely be forced to settle for this [33%] price cut. However, China also buys a significant portion of its iron-ore imports from the spot market, so they could always increase their stake in this market.”

Naryshkine told Mining Weekly Online that the market was losing sight of the fact that iron-ore prices were still about three times higher than six years ago.

KIO will start price negotiations with its customers towards the latter part of the year.

A spokesperson for the company stated that it was too soon to comment on what the Rio Tinto settlement might mean for KIO’s negotiations.