Demand for iron ore from Chinese steelmakers is falling according to Australia’s fifth-largest iron ore producer Mount Gibson Iron, which today reported that a number of its Chinese customers had requested a delay in its hematite ore shipments scheduled for the second quarter of fiscal 2009.

The Perth-based iron ore play’s share price has taken a battering on the back of the news, falling as much as 37.5c (32%) to an intraday low of 78c with over 11.3 million shares changing hands by 11.42 EDT.

“Customer and iron ore sector analysis indicates a slowdown in demand for iron ore in China due to current economic uncertainty and the tightening of credit facilities, leading to reductions in steel production and the current significant build-up of iron ore stockpiles at Chinese ports,” the company said in a statement.

Mount Gibson said it had no obligation to agree to any of the relevant customers’ requests as each customer had entered into binding long-term ore sales agreements and were contractually obligated to take delivery of the shipments allocated to it in the second quarter.

“Mount Gibson will endeavour to reach an acceptable accommodation in respect of its long-term shipping schedules with its contracted customers and take the necessary steps to minimise any disruption that may result to operations,” the company said.

“Mount Gibson is well placed to modify operational objectives, project objectives, associated expenditure and the production targets, should this be required, and will advise the market as to the possible impact on its operations once discussions with customers are more advanced.”

Fat Prophets head of mining and resources research Gavin Wendt told MiningNews.net that while it was a worrying development, the slowdown in iron ore demand from China’s steel mills was a temporary issue.

“From a short-term perspective it is a worrying sign, or let’s just say that it is of concern,” he said.

“Sure we are seeing a slowdown in China…[but] I don’t think this is a long-term situation.

“I don’t think we are going to see a significant easing off in the infrastructure spending and building that is taking place in China.

“However, short term we are expecting some sort of an easing there but it is obviously a shock to the system and this sort of market is very edgy.”

Wendt said the fall in iron ore demand could be explained by the immediate impact of the global economic slowdown and also as a strategic move by the Chinese to negotiate lower iron ore prices in the future.

“This could be part of a strategic game that the Chinese are playing given that they were so opposed to the price rises that were negotiated this year,” Wendt said.

“This could be an early strategic move in the lead up to the next round of price negotiations to try and put as poor a light as they possibly can on iron ore demand because, at the end of the day, it’s in their strategic advantage to drive prices down.”

Last month, the China Iron and Steel Association said Chinese steelmakers wouldn’t buy from Brazil’s Vale in the short term as a result of a pricing dispute.

Vale was looking to raise prices for Asian mills to match what European clients were paying, but the China Iron and Steel Association said that was "unreasonable" because of the slowing demand for steel from automakers and builders.

Meantime, major Chinese steel makers are reportedly considering a 20% production cut in October, according to China Securities Journal.

However, Fortescue Metals Group executive director of operations Graeme Rowley told the Australian he remained extremely positive over China’s demand for iron ore.

“…obviously from our perspective that means we'll get cash flow and we will continue to grow,” he said.

“China's growth is going to slow down to 8, maybe 9 per cent – we'd all love to have that growth, it's significant growth, and for a country the size of China it's enormous growth in anybody's language.”

Iron ore companies have fallen in morning trade with BHP Billiton down 9c to $29.81, Rio Tinto was down $2.04 to $79.08 while FMG was down 19c to $3.43 and Portman fell 1c to $21.10.

Shares in Mount Gibson were last trading at 87c, down 28.5c.