(Reuters) - Some Chinese steel mills have postponed delivery of iron ore from miners including top supplier Vale as a slow steel market cuts demand for the raw material and producers expect a further drop in prices, sources at mills and traders said on Thursday.
The move reflects slowing appetite from the world's biggest consumer of iron ore, which is also a huge market for other commodities, amid a shaky global economy that has prompted mining giant BHP Billiton (BHP.AX) (BLT.L) to put the brakes on an $80-billion spending plan.
"We are postponing shipments from a major miner because now no one has the courage to buy cargoes due to arrive in June," said an iron ore purchasing official with a midsize Chinese steel mill.
"We are buying the long-term iron ore contract on a quarterly pricing basis, but it's obvious that spot iron ore prices will fall further in June. Some Chinese steel mills have started to think about shipment deferrals since April."
The mills are delaying iron ore deliveries as sluggish steel demand in China, the world's top producer and consumer, dragged down prices to multi-month lows this week, squeezing already thin profit margins.
Spot iron ore .IO62-CNI=SI fell to $135.10 a metric ton (1.1023 tons) on Wednesday, its lowest since late February, as key Shanghai rebar futures sagged to 5-1/2-month lows. <IRONORE/>
An official who buys iron ore for another medium-sized Chinese steel mill which has a long-term contract with top miners said his company had delayed shipments since last month and been reluctant to make any recent purchases.
"They're (Chinese mills) already knocking them back on the contracts. I know sellers on long-term contracts who have told me that they've had stuff deferred," said a physical iron ore trader in Singapore, who said the postponed shipments include those with contracts with Brazil's Vale (VALE5.SA) and BHP Billiton.
BHP Billiton declined to comment. Officials for Vale in China were not immediately available for comment.
BHP Billiton on Wednesday said it was rethinking its $80 billion five-year expansion plan, mapped out in 2011, given the more challenging global environment.
Chinese mills also sought to delay shipments in October when iron ore prices slid nearly 31 percent as weak steel demand forced producers to curb output.
At that time, miners had to tweak pricing mechanisms to more closely reflect spot rates. Previously, quarterly contract prices were based on the average of the prior quarter instead of the current three-month period.
Before prices were based on quarterly and then spot rates in the past two years, iron ore contracts were set annually every year for four decades.
"Steel mills and miners are now more flexible in taking or delivering cargoes. When prices rise quickly, miners are using various excuses to delay shipments and choose to sell when they believe prices are good enough," said the official with the first steel mill.
The shipment postponements meant more cargoes were finding their way into the spot market, driving down prices that are already 30 percent down from last year's peak.
But given the fat margins that iron ore miners make on sales, traders say Vale, BHP Billiton and Rio Tinto are unlikely to incur any losses from their biggest revenue earner.
"From a producer point of view even if they sell in the spot market for $120, they're still earning $60-$80 a tonne," said a Hong Kong-based trader.
"It's not even about making a loss, it's just about less money to make."
Analysts and traders say China has to curb steel output further to depress supply and fuel a recovery in steel prices that would revive appetite for iron ore.
China's crude steel output eased 1.6 percent to 60.575 million metric tons in April from a record high in March, government data showed on Tuesday.