Rio Tinto, the mining group, set the scene for a slump in iron ore contract prices this year when it announced that it had finally agreed to price cuts averaging 37 per cent with Nippon Steel, a major customer.

The long-awaited deal, the first in the steel industry this year, sets a benchmark for negotiations between other ore producers and steelmakers in the wake of a collapse in global demand for steel products from the construction industry and carmakers.

The two sides agreed a price cut of 33 per cent, to 97 cents per dry metric tonne for fines, and of 44 per cent, to 112 cents per tonne for lump - a coarser kind of ore. Overall, the blended average price reduction was 37 per cent.

The fall was the first in seven years, but was not as severe as some analysts had expected, given the spot price of ore. In China, the spot price of fines is down by 42 per cent and of lump 57 per cent. Rio Tinto's shares rallied by 2.2 per cent to A$65.46 in Australian trading.

Sam Walsh, chief executive of Rio Tinto's iron ore division, said: "We believe this 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."

The new price, which applies to all ore delivered from 1 April 2009, is still the second highest on record. However, Chinese steelmakers are pushing for even bigger price reductions of 40 to 50 per cent.

Miners and steelmakers have been deadlocked in talks for weeks, but the deal is expected to help to bring agreement elsewhere. BHP Billiton is also negotiating prices with Japanese and Korean customers. Vale, the Brazilian miner, has been waiting for Rio Tinto and BHP to settle first.

Rio Tinto is currently battling with shareholders over a $19.5 billion (£13 billion) capital raising with Chinalco, China’s state-owned metals group.

The deal, which consists of Rio raising $12.3 billion by selling assets to Chinalco and a further $7.2 billion by issuing convertible bonds that pay an average of 9.2 per cent, has angered some shareholders who have not been offered the securities and who believe that improved commodity prices and a renewed appetite for corporate debt offered the company alternatives.

Some shareholders have argued that the company could instead hold a rights issue.

Should the deal go ahead, the bonds issued would take Chinalco’s stake in Rio from 9 per cent to 18 per cent when they mature in six years.

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