Vale of Brazil, the world’s largest iron ore producer, on Friday said it would cut production by 30m tonnes a year, equal to more than 10 per cent of its total output in 2007, as a result of the slowdown in the global economy.
The move comes after experts have warned that, as iron ore supplies outpace consumption, miners face the prospect of the first price cut in seven years when they negotiate annual supply contracts with steelmakers.
Iron ore is the main raw material for making steel.
Vale had been expected to ship about 320m tonnes of iron ore this year. But the company said an estimated 20 per cent drop in global steel production from 2007 levels had resulted in a “direct and immediate” reduction in demand.
“We simply do not have the physical space to accumulate stocks of dozens of millions of tonnes of iron ore,” it said in a statement.
Vale said it would suspend production of iron ore from November 1 at mines in Minas Gerais in southern Brazil, where production costs were higher and the quality of iron ore lower than at its largest mines at Carajás in the Amazonian state of Pará.
In addition, two pellet production plants responsible for 20 per cent of Vale’s production would be closed for maintenance.
Vale’s production cut could help miners avoid a price reduction as the move is likely to reduce record high iron ore inventories in China and prop up spot iron ore prices, which have fallen to around $70 a tonne from a record $200 earlier this year.
After this year’s record 85 per cent jump in iron ore prices, commodities traders and bankers said that miners could see a cut of 10-20 per cent in contract prices for the year starting in April 2009, the first reduction since iron ore prices fell 2.4 per cent in 2002 when the global economy slowed.
The first negotiations for the 2009 contracts are due this November, although an agreement could be delayed until the second quarter of next year as mining executives hold out for stronger demand.
Vale on Friday reiterated it had no intention of making a fresh bid for Xstrata, its Anglo-Swiss competitor. There has been persistent speculation that Vale was preparing to take a substantial stake in Xstrata after the cost of insuring against default in bonds issued by Glencore, Xstrata’s controlling shareholder, rose to distressed levels.