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

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

By Clyde Russell

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

The cutbacks at top global miners BHP Billiton and Rio Tinto came despite a recent rebound in iron ore prices from three-year lows.

Spot iron ore traded at $117.20 a tonne on Tuesday, 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 the 2012 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 quoted as a floor price for the steel-making ingredient, although indications are that prices may regain that level within the next few months.

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

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

Hopes for higher prices really rest on China, which consumes about 70 percent of seaborne iron ore, and has recently announced measures aimed at stimulating infrastructure spending and industrial output.

Nonetheless, it's important to note that the market isn't signalling a strong rebound in iron ore prices, rather a more gradual pick up.

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

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

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

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

An unspecified number of jobs will go, this time in front-line operations, adding to cuts in service and support roles that have resulted in savings of about $500 million so far.

"Overall, I'd say that we are more cautious on the outlook for the next few quarters for our business than we would have been a couple of months ago," Rio Chief Executive Tom Albanese said 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 in iron prices to focus on costs, which tend to be less important when prices are robust and profits easier to make.

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

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

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

Cutting spending also tells both state and federal governments they should be wary of expecting resources to be an ever-expanding cash cow for their bureaucracies, and also goes some way to combating the tax-grabs of recent years.

However, it's also likely that iron ore export numbers will be subdued for the next few months, with Port Hedland shipping 9.5 percent less in September than in August.

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

China's trade data for September is due on Oct. 13 and a softer outcome for iron ore wouldn't be surprising, after August's figures showed a gain of almost five million tonnes to 62.45 million from July.

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

What this does confirm is that Chinese iron ore demand is far from having collapsed, and while growth is softer so far in the second half, it isn't so weak as to justify the collapse in prices 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 impediment to steel demand.

(Editing by Clarence Fernandez)

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