Rio Tinto Group, the world's second-largest iron ore exporter, agreed to a 33 per cent cut in contract prices with Japan's Nippon Steel, the first decline in seven years as the global recession slashes demand.

Nippon Steel, the world's second-largest steelmaker, agreed to pay Rio 97c a dry metric tonne unit for its benchmark product in the year started April 1, London-based Rio said. That's about US$61 a tonne and compares with last year's record of 144.66c for Rio's Pilbara Blend fines.

The accord, the first major settlement this year, may be resisted by Chinese mills, the biggest producers, who've called for price cuts of as much as 50 per cent. The worst recession since World War II has slashed demand for cars and building materials, cutting profits for steelmakers and ore producers.

"What looks like a pretty good deal might end up being a bit tougher when they come across the Chinese," said Mark Pervan, a senior commodity strategist at ANZ in Melbourne. "Historically you could say this is a done deal, when Rio strikes with Nippon, well everyone follows, but I get a feeling maybe the Chinese have got something else in store."

Rio advanced A$1.38, or 2.15 per cent, to A$65.46 on the Australian stock exchange yesterday.

Nippon Steel spokesman Hayato Uchida confirmed an agreement with Rio at the cited prices. Posco, Asia's third-biggest steelmaker, said the company was still in talks with Rio.

"We're still negotiating," Choi Doo Jin, a spokesman for the Pohang, South Korea-based company, said yesterday.

The price accord is the second-highest price on record. Goldman Sachs JBWere had forecast benchmark prices this year may drop 40 per cent because of lower demand for cars and building materials, according to a March 17 report.

"We believe this settlement is a realistic outcome for both parties, one that reflects the global market for iron ore and the current challenging market conditions facing our customers," said Sam Walsh, Rio's iron ore unit chief executive.

After taking into account an expected loss on aluminium, iron ore may generate about 85 per cent of Rio's earnings in 2009, JPMorgan Chase said.

Nippon Steel agreed to pay 112c per dry metric tonne unit for Rio's premium Pilbara Lump product, 44 per cent lower than last year's contract price, the statement said. Rio last year won an 80 per cent gain in fines prices with Asian customers and a 97 per cent rise in lump prices.

Vale SA, the world's biggest iron-ore producer, last week said it was waiting for rival BHP Billiton, the third-biggest exporter, and Rio to reach an accord before deciding prices for the year. Melbourne-based BHP spokeswoman Kelly Quirke declined to comment on the progress of BHP's iron ore talks with customers. The stock rose 1 per cent to A$34.20.

"To the extent that it wasn't a bigger cut, it's sort of beneficial for Rio Tinto," said Peter Arden, a Melbourne-based analyst at Ord Minnett. "It could have been a lot worse."

China, the world's biggest consumer of iron ore, has previously wanted a price cut of between 40 per cent and 50 per cent. Calls to Shan Shanghua, secretary general of China Iron and Steel Association, weren't immediately returned.

- BLOOMBERG