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COLUMN-Iron ore market may be closer to sweet spot: Clyde Russell

--Clyde Russell is a Reuters market analyst. The viewsexpressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Oct 10 (Reuters) - The job losses andcost-cutting at Australia's major iron ore producers show theyare taking to heart the adage to never let a good crisis go towaste.

The cutbacks at top global miners BHP Billiton andRio Tinto came despite a recent rebound in iron oreprices from three-year lows.

Spot iron ore traded at $117.20 a tonne onTuesday, up 35 percent from the low of $86.70 hit on Sept. 5.

But the key point is that the price is still well below the2012 peak of $149.40 a tonne in March and the record high of$191.90 in February last year.

The price is also below the $120-a-tonne level often quotedas a floor price for the steel-making ingredient, althoughindications are that prices may regain that level within thenext few months.

Iron ore swaps in Singapore are still incontango, with the six-month contract trading around $117.58 atonne, a premium of 2.1 percent to the $115.08 of thethree-month contract.

More usually iron ore swaps trade in mild backwardation, sothe current contango shows the market expects higher prices asthere appears to be little threat to supply.

Hopes for higher prices really rest on China, which consumesabout 70 percent of seaborne iron ore, and has recentlyannounced measures aimed at stimulating infrastructure spendingand industrial output.

Nonetheless, it's important to note that the market isn'tsignalling a strong rebound in iron ore prices, rather a moregradual pick up.

This is in line with expectations that the Chinese stimuluswill be slower and softer this time around, rather than themassive and rapid boost after the 2008 global financial crisis.

Against this backdrop it makes perfect sense for BHPBilliton and Rio Tinto to switch emphasis from expanding outputto curbing costs, even though both companies maintain belief inthe long-term strength of the outlook for iron ore.

BHP, the world's biggest mining company, will shed anundisclosed number of jobs in its iron ore business, adding tocuts that saw the company shelve a $20 billion plan to expandits main export facility for the ore in Western Australia state.

Rio said on Tuesday it would step up cost-cutting because ofthe uncertain short-term outlook for China.

An unspecified number of jobs will go, this time infront-line operations, adding to cuts in service and supportroles that have resulted in savings of about $500 million sofar.

"Overall, I'd say that we are more cautious on the outlookfor the next few quarters for our business than we would havebeen a couple of months ago," Rio Chief Executive Tom Albanesesaid in London ahead of an investor seminar.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic of China's iron ore market: Graphic of Australia's mining and commodity prices: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> SIGNALS TO WORKFORCE, GOVERNMENT

Both companies appear to be using the unexpected downturn iniron prices to focus on costs, which tend to be less importantwhen prices are robust and profits easier to make.

While this makes good business sense, a slightly morecynical benefit is that it allows the companies to send signalsto both their workforce and the government.

Rising labour costs have been the bane of Australia'sresources boom, with even low-skilled workers prepared to livein the remote mining areas able to command salaries above$100,000 a year, or almost double what a university-educatedteacher would be paid.

But cutting jobs and trimming contractors makes it clearthat the good times with wages are probably over, and increasesare likely to be more modest from now on.

Cutting spending also tells both state and federalgovernments they should be wary of expecting resources to be anever-expanding cash cow for their bureaucracies, and also goessome way to combating the tax-grabs of recent years.

However, it's also likely that iron ore export numbers willbe subdued for the next few months, with Port Hedland shipping9.5 percent less in September than in August.

In some ways the decline isn't too much of a surprise giventhe week-long holiday in China at the start of this month, butit does show that underlying demand for iron ore is weak.

China's trade data for September is due on Oct. 13 and asofter outcome for iron ore wouldn't be surprising, afterAugust's figures showed a gain of almost five million tonnes to62.45 million from July.

Iron ore imports are up 8.7 percent for the first eightmonths of the year from the same period in 2011, still ahead ofa Reuters' poll of analysts in December that forecast a 6percent gain over 2012.

What this does confirm is that Chinese iron ore demand isfar from having collapsed, and while growth is softer so far inthe second half, it isn't so weak as to justify the collapse inprices seen in the September quarter.

We may just be getting closer to a sweet spot in iron ore,with the price around $120 a tonne, which is high enough to keep

producers happy but also low enough not to act as an impedimentto steel demand.

(Editing by Clarence Fernandez)

((clyde.russell@thomsonreuters.com)(+61 437 622 448)(ReutersMessaging: clyde.russell.thomsonreuters.com@reuters.net))

Keywords: COLUMN RUSSELL/IRON ASIA