TORONTO (miningweekly.com) – The biggest producer of iron-ore, Companhia Vale do Rio Doce, is selling iron-ore under long-term contract at a discount to the benchmark prices it agreed to with customers last year.

The company, facing weak demand for the steelmaking ingredient, is making its long-term contract conditions “flexible” and is selling the iron-ore at 80% of the benchmark price, Vale said in a statement on Monday.

The balance will be recovered later and prices will be adjusted after the current round of negotiations are concluded with customers.

“Provisory sales are equivalent to 80% of 2008 benchmark prices and they will be adjusted afterwards, according to 2009 benchmark price negotiation outcome," Vale said.

Term contract prices for iron-ore are set every year with effect from April 1, but had to be applied retroactively last year, after negotiations dragged on between the top three producers: Vale, Rio Tinto and BHP Billiton, and their main customers in Asia and Europe.

The talks this year will be very different from 2008, when miners had the upper hand and managed to wrangle big price increases out of the steel industry.

Vale agreed price increases between 65% and 71% with large steelmakers, while BHP Billiton agreed a 97% increase and Rio Tinto secured a 96,5% price rise.

Now, however, the steel producers want the mining companies to agree to sharply lower prices, as slowing economic activity translates into weak demand for steel and iron-ore, which has led to widespread production cuts by steelmakers around the world.

The miners, on the other hand, are hopefully eyeing signs of economic recovery in China and elsewhere, and will likely hold out for more muted price cuts.

According to reports last month, Chinese steel producers opened the latest round of negotiations with a demand for a 40% to 50% cut in prices.

However, analysts are generally predicting that the final prices agreed on will be between 25% and 35% lower than 2008 contract prices.

Although Rio and BHP are understood to be actively selling iron-ore into the spot market, Vale, which supports the current benchmark system, has repeatedly said that it is not doing so.

Last year, Rio Tinto and BHP Billiton were able to secure slightly higher prices than Vale because high freight and shipping costs made it much more expensive to ship ore to Asia from Vale's Brazilian mines than from their operations in Australia.

However, because of the effects of the financial crisis, freight rates have fallen markedly, and this may not be such an issue in this year's negotiations.

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