Analysts have estimated that real year-on-year Chinese iron ore production has declined 5-20%, while steel demand fell 9.1% year-on-year in November, after falling 17% and 16% year-on-year in September and October respectively.

However, Macquarie said the destocking cycle appears to be coming to an end, with reports of demand picking up and some steel mills restarting production.

“The concern for the rest of the world is that a Chinese export recovery will cap a global steel price recovery,” Macquarie said.

Total Chinese steel production is still expected to be 4.3% up when compared with 2007 figures.

According to Macquarie, Chinese consultants Mysteel said BHP Billiton has proposed to change iron ore prices from January 1, 2009, but only on the condition that new contracts are based on index prices.

The Chinese Iron and Steel Association dismissed the idea, saying it was open to a flexible pricing system, but index-based pricing was “unacceptable”

Index price provider Platts said spot 62% iron is trading at $74 per tonne cost-and-freight, only 17% lower than the current Australian benchmark price delivered to China using spot freight rates.

Reports have also emerged that South Korea's POSCO has made its first-ever production cut. Steel output will be curtailed by 200,000t in December and 370,000t next month.