Mining shares were hammered yesterday as Rio Tinto called time on the Chinese export markets and forecast weaker growth in demand for metal from the smelters and workshops of the People's Republic.

The warning from the minerals and metals giant that Chinese mills would cut production to avoid losses sent London's mining stocks tumbling. Rio hinted that it might reduce output at its aluminium smelters and signalled that it would delay plans for $10 billion (£5.8 billion) in asset disposals.

Waves of panic-selling ripped 16 per cent off its value and that of BHP Billiton, its rival, which is attempting a takeover of Rio. The mining sector fell by 17 per cent and pulled the overall market down, taking with it the oil and gas companies.

Rio's warning was not unexpected among the mining fraternity, but the stark comments from Tom Albanese, its chief executive, rattled the wider market. The mining conglomerate had been maintaining a bullish outlook over Chinese demand for metal, but yesterday Mr Albanese said that he expected a marked reduction in demand in the third quarter because of the shutdown of plants.

“In the near term, the Chinese economy is pausing for breath. China is not completely insulated from an OECD recession and we will see an impact on Chinese exports,” he said.

It is the first acknowledgment by a leading mining group that all is not well in China, where steel mills have been suffering from weak prices and export demand. On Tuesday Posco, the South Korean steelmaker, said that it was facing a squeeze from high input costs and weak steel prices.

Faltering demand for steel in construction markets and from car manufacturers is bringing prices down and hurting the mills. Mr Albanese set out the problem yesterday: “While apparent demand for steelmaking raw materials, copper and aluminium has slowed, lower prices mean that Chinese producers are facing margin pressure and should be expected to cut their production.”

Rio said that its financial position was sound and that its cash generation was strong, but it was reviewing the timing of $10 billion of asset sales because of the falling markets. The company said that although aluminium output was at record levels, it was responding to the signs of weakening demand and might cut production rates at higher-cost smelting units.

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