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The first ones to be cut are the higher cost and lower grade ones.

Vale to cut iron ore production by 10%

By Jonathan Wheatley in São Paulo and Javier Blas in,London

Published: November 1 2008 02:00 | Last updated: November 1 2008 02:00

Vale of Brazil, the world's largest iron ore producer, yesterday said it would cut production by more than 10 per cent due to the slowdown in the global economy.

The move came after traders and bankers warned that iron ore miners faced the prospect of the first price cut in seven years for their annual benchmark contracts with steelmakers as ore supplies outpace consumption.

Vale had been expected to ship about 320m tonnes of iron ore this year. But the group said a drop in global steel production estimated at 20 per cent from the levels of 2007 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.

Vale said it would suspend production of iron ore from today 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 it is likely to force a drop in record high iron ore inventories in China and could prop up spot iron ore prices, which had fallen to $70 a tonne from a record $200 earlier this year.

After this year's record 85 per cent jump in iron ore prices, traders and bankers said that miners could see a cut of 10-20 per cent for the annual contracts for the year starting in April 2009. Any cut would be the first reduction since iron ore prices fell 2.4 per cent in 2002, when the global economy slowed.

The first negotiations for the contracts are due this month, although an agreement could be delayed until the second quarter of next year as mining executives hold, betting that by then demand would be stronger.

Vale reiterated yesterday it had no intention of making a fresh bid for Xstrata, its Anglo-Swiss competitor. There have been persistent rumours on financial markets 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 controller, rose to distressed levels.

Glencore has denied it is in talks, and Vale issued a statement last week saying it had no intention of making a bid for Xstrata. The company reiterated that denial on Thursday.

Vale came close to buying Xstrata at the beginning of this year, but the two sides failed to agree on a price. Vale then said it would concentrate on organic growth through an investment programme worth $59bn over the next five years.

It said some plants producing other metals used in steel making would be closed temporarily or operate at reduced volumes.