STEEL demand has collapsed and the news from iron ore producers is looking anything but rosy.

Vale and Fortescue Metals Group yesterday both revealed the impact of reduced iron ore demand on their production figures and future plans.

The Brazilian major may cut back its iron ore production by some 25% for 2009, after its output for the first three months of the year fell from 74.5 million tonnes in 2008 to 46.9Mt this year.

Vale has also been discounting its iron ore by some 20%.

FMG revealed yesterday it had suffered a 65% quarter-on-quarter plunge in earnings for the March quarter, and was pursuing a wide-scale cost reduction effort to mitigate the effects of weaker demand and wet weather.

As a result, FMG expects to produce 26Mt for this financial year, down 15% on its previous projections.

The two big boys on the iron ore block, BHP Billiton and Rio Tinto, have also been suffering.

While BHP’s production for the first three months of the year was actually up, the miner revealed last week it had sold around 28% of its iron ore on the spot market in the past nine months, where prices have been trading below benchmark for some time.

Rio Tinto, meanwhile, also reported year-on-year production falls of around 15% from its iron ore operations in the Pilbara.

The weakness in iron ore, of course, directly reflects the hard times that have fallen on the world’s steel industry.

Steelmakers are clearly suffering. ArcelorMittal posted losses of $US1.06 billion this week, Hyundai Steel suffered a 64% drop in profits and China is not immune, with leading Chinese mill Baosteel’s profits falling by some 98%.

Macquarie Bank analysts said the steelmaking collapse had been driven mainly by non-Chinese steelmaking, where world apparent demand for steel declined by some 23.5% year on year in the first quarter – with world demand, apart from China, falling by 37% year on year.

While Macquarie noted apparent Chinese steel demand seemed strong, increasing by 7.4% year on year, the bank was concerned this demand was driven by stock-building and simply represented the movement of steel from producers into the warehouses of China’s State Reserves Bureau (SRB).

On the back of this weakening in demand, there have been media reports from the Metal Bulletin that China could cut iron ore imports by up to 21% this year, according to an official from the China Metallurgical Mining Enterprise.

Other news reports out of China suggest Chinese mills are pushing for iron ore price cuts of more than 40%, with some hoping iron ore prices will actually halve.

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