The announcement that the world’s largest iron ore producer, Brazil’s Vale (AKA CVRD), has cut production of iron ore, nickel, aluminium and other minerals because of the slowdown in global demand is by far the most important sign so far that the resources boom is well and truly over.

It was the second cutbacks announcement in a week from the giant: the week before it involved cuts to its nickel production over the next few months to try and right size output and demand.

So far we’ve heard nothing from BHP and Rio about their production and export levels from their huge mining businesses in the Pilbara region of Western Australia. So when will we see BHP Billiton shelve its all share bid for Rio Tinto and reveal cuts in production? And when will Rio Tinto follow with production cuts of its own, especially in iron ore? BHP last week put back development of the huge Olympic Dam project in South Australia by at least two years, to the time frame 2013 to 2015, with the project finished by 2025. But iron ore is the major business of all three companies and that’s where Vale of Brazil, BHP and Rio’s major global competitor, has cut deepest.

Vale said it’s cutting iron production by 30 million tonnes a year, equal to more than 10% of 2007’s output., or around 9% of the 325 million tonnes it planned to ship in 2008.

Vale blamed a slump in global steel production of 20% — the fall in global steel production from 2007 levels had resulted in a “direct and immediate” reduction in demand, according to a translation of a statement on its website in Brazil.

World spot iron ore prices have fallen from more than $US200 a tonne earlier in the year to around $US70 a tonne currently, which is less than the contracted price for high quality ores from Brazil and the Pilbara region of Australia. Vale is a big supplier to Europe as well as Japan and the rest of Asia. BHP and Rio’s biggest markets are in Asia. Demand for steel in Europe and the US seems to have fallen faster than in Asia.

The cuts will be the first for seven years as steel production in China and elsewhere falls amid the global downturn. Steel prices and output is falling in South Korea, Japan, the US, Russia and Western Europe. The huge ArcelorMittal, the world’s biggest steelmaker, is reviewing output levels around the world. It has already ordered a 15% cut globally, closed furnaces in Europe and the US for up to six months, and cut output in Kazakhstan by a reported 30%. That would be upwards of 2 million tonnes a year from the 6 million tonnes a year facilities. It has closed half its furnaces in France and its closures in the US have helped shut down 19 of the 25 blast furnaces operating in that country.

In India the giant has seen steel demand drop sharply, forcing it and other producers to cut prices since mid year, some by as much as 50%. That would mean most of the price rises from the start of the year have been given up. That plant supplies steel to China and Russia and demand has slumped in the past two months.

The steel giant is expected to detail more cuts and other plans when it reveals its third quarter earnings Wednesday night in Europe. Vale said it would suspend production of iron ore from Saturday mines in Minas Gerais state 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% of Vale’s production would be closed for maintenance, according to this translation of the company’s statement in Portuguese, on its Brazilian website. The company will keep a ferroalloy plant in France idle until April, and a plant in Norway will extend its furnace maintenance until June. The two extended closures will result in a production cut of 600,000 metric tonnes of manganese ore and 90,000 metric tonnes of ferroalloy.

Vale said its manganese ore and ferroalloy operations in Brazil will be shut from next month through January. Vale also is discontinuing its use of higher-cost thermal power generation in Indonesia, resulting in a 20% cut (about 17,000 tonnes) of nickel-in-matte output. Its nickel refinery in Dalian, China, will continue running at 35% of its nominal capacity. One of the company’s Rio de Janeiro aluminum smelters will cut production by 60% and production at its Cadam kaolin subsidiary will be reduced by 30% because of falling demand for kaolin from the paper industry.

Peter Fray

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