Cutting iron ore production was a prudent move by Australian miners battling a slowdown in demand from China ahead of negotiations on contract prices with the Asian giant, analysts said Tuesday.

Rio Tinto Ltd. (RTP) on Monday slashed output at its western Australian plants by 10% to bring production in line with revised customer requirements following a drop in demand from China.

The Anglo-Australian miner said it had revised its iron ore shipments for the calendar year 2008 down to 170-175 million tons, from 190-195 million tons.

“We believe this will be a short, sharp slowdown in China, with demand rebounding over the course of 2009, as the fundamentals of Chinese economic growth remain sound,” chief executive Tom Albanese said in a statement.

Emerging iron ore miner Fortescue Metals said it too would cut output by 10% as it brings forward a planned shutdown to upgrade port and mine facilities.

The moves follow the announcement earlier this month by the world’s largest producer of iron ore, Brazil’s Vale, that it would slash output by up to 10% to adjust to shrinking demand caused by the global financial crisis.

“From an iron ore producers’ perspective, things are tough out there and they are going to remain tough it would seem for at least six months and probably longer,” said portfolio manager at Pengana Capital Tim Schroeders.

“But you don’t want to make a rod for your own back by building up inventory.

“It’s a prudent thing to do to adjust your production output in light of the rapid change in demand from your customers.”

Paul Adams, head of research at DJ Carmichael in Perth, said the mining companies had to reduce their inventories as changed conditions mean China has the upper hand in iron ore contract negotiations, which could begin this month.

“I would have to say that the shoe is on the other foot in terms of the negotiations for this year,” he said.

“The advantage has to be back with the Asian negotiators, whereas in the previous couple of years it has been firmly with the iron ore producers.”

Iron ore prices have risen for six consecutive years as demand for the steel- making mineral has been driven by rapid growth in China and other developing nations.

Mid-year, BHP Billiton and Rio Tinto said they had agreed to price hikes in the order of 80%-97% with China’s Baosteel.

Adams said he expected that upcoming contract prices would drop, and that negotiations would be “even more acrimonious this year than last year because of the pressure on both sides.”

“It wouldn’t surprise me if the final figure was somewhere between neutral, in other words no change, to say a drop of 15%,” he said.

“I would imagine that, in the current climate, it would be closer to a drop by 15%. But, again, it all will be determined by the stimulus package (announced by China). I just don’t think it’s going to go up.”

Schroeders agreed that iron ore prices will drop despite Beijing’s CNY4 trillion ($586 billion) economic booster to protect its economy from the global crisis.

“That’s a given. It’s just a question now of how far they fall,” he said.

The world’s biggest miner, BHP Billiton Ltd. (BHP), has said it has no plans to cut production.

But head of commodities research at ANZ, Mark Pervan, said it was only a matter of time before BHP, which has continued to sell on the spot market despite the fact the price had dropped, also cut production.

“It will drag the contract price down if they keep playing the spot market,” he told the Sydney Morning Herald.

Shares in the iron ore miners fell on the Australian share market Tuesday.

But dealers said BHP Billiton and Rio Tinto could have fallen prey to profit takers after big gains on Monday when they closed up 7% and 7.9% respectively.

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