Nippon Steel's decision to agree to a 33-per cent price cut in the annual contract price for ore from Rio Tinto, has rankled Chinese steelmakers, who have been holding out for a minimum 40-per cent reduction, in view of the decline in global demand and prices.

China feels by Nippon Steel's decision could undermine its own ongoing negotiations with leading global miners for the annual contract price for iron ore.

The world's second largest iron ore miner, Rio Tinto's subsidiary Hamersley Iron yesterday reached an agreement with Nippon Steel Corporation, the world's second-largest steelmaker on the annual contract price for Hamersley iron ore with a 33-per cent cut in the contract price of fine ore and a 44-per cent cut in lump ore.

The agreement has angered the Chinese steelmakers, with its trade body, China Iron and Steel Association (CISA), threatening to reject the price cut deal.

Last month, Chinese steel producers and CISA failed to reach an agreement on the amount of the price cuts with world's three mining giants Vale of Brazil, BHP Billiton and Rio Tinto in order to fix this year's long-term iron ore prices. (See: Global iron ore miners locked in pricing battle with China)

In wake of the plunging demand for steel, Chinese steelmakers are seeking price cuts of over 40 per cent on the annual contracts while miners had been unwilling to budge beyond 20 per cent.

China, the biggest importer of iron ore, has justified a price cut of 40 per cent on two counts. First, it says, iron ore prices have been raised by nearly 400 per cent in the past five years of the global boom that led to a  demand for steel. Second, it says, the demand for steel was unlikely to pick up in the current year due to the prevailing global recession and economic slump.

Posco of South Korea recently said that iron ore prices should be reduced by half this year, or approximately $40 to $45 a metric ton.

China had hoped that the Asian steel manufacturers, could be united to press for a substantial price reduction by global iron ore miners for this year's benchmark iron ore annual contract prices.

However, the Anglo-Australian miner Rio Tinto succeeded in breaking the Asian steel makers' unity by getting Nippon Steel to ink an agreement for a 33-per cent cut in iron ore.

But now Posco, which had vociferously backed China on the demand for a 40 per cut, has changed tack and said that it will also agree to a 33-per cent cut in contract iron ore prices.

By having pulled the rug from under the Chinese steel manufacturers, Rio Tinto seems to have won the first round although the treasurer of the state of Western Australia is unhappy at the potential loss of about $135 million in royalties from the sale price of Hamersley Iron's iron ore in the next financial year, as the company's mines are located in the state.

Some analysts say that it will be very difficult for China to obtain a 40-per cent cut for the current year since the miners are unlikely to agree to two different global annual contract rates.

However, others disagree, saying that with steel manufacturers worldwide cutting down on production by nearly 40-50 per cent, iron ore miners will also be forced to cut their production to match demand if the price cut is only 33 per cent.

Analysts also believe that Chinese steelmakers have the option to source their purchases from others miners than the big three, such as the many small-and medium-size Australia mining companies and also source supplies from India and South Africa.