In apparent confirmation of earlier reports that China has offered to purchase iron ore for fourth-quarter contracts at a much cheaper rate, a steel lobby leader has verified that Chinese steel companies are discussing a new pricing mechanism with the world's big miners, a move seen to benefit both iron ore suppliers and consumers.

Analysts predict iron ore futures may still drop to as low as $95 a ton in the short term before recovering to average at least $160 a ton next year as China's steel makers restock supplies.

Zhang Changfu, vice-chairman of the China Iron & Steel Association, said steel makers in China have been talking with Vale SA, Rio Tinto Group and BHP Billiton Ltd., the world's biggest iron ore producers, and are seriously considering instituting a new pricing system for the raw commodity.

As a result, iron prices may further decline amid weak demand and high stockpiles, Changfu said.

Last month, prices of iron ore fell 32 per cent to a record low of $120 a ton on Friday, owing to slowing steel demand from property developers, automakers and the machine building industries.

An iron ore oversupply is expected next year as several iron ore projects come onstream.

"Iron ore stockpiles at nine major ports reached a record high of 980 million tons, most of which was bought at $165 a ton. But the price is around $120 a ton now. How can steel mills and iron ore traders deal with this high priced iron ore?" Zhang said, adding that iron ore prices could continue to fall as there is no demand recovery in sight.

Marcus Randolph, chief executive of BHP's ferrous and coal business, said in October that BHP Billiton Ltd. has been selling most of its iron ore to consumers at a monthly pricing mechanism, compared with Vale and Rio who still sell through quarterly contracts.

Tom Albanese, chief executive of Rio Tinto, confirmed during an analysts' forum in Sydney in October that iron ore contracts are slowly moving toward spot pricing.

Meanwhile, Chinese steel companies reported on Monday low profits in the first three quarters of this year.

Profits for China's 77 major steel companies grew 27.7 per cent year-on-year during the January-September period, but most largely came from the companies' mines, power plants and investments rather than steel business, the China Iron and Steel Association said in a report.

China is currently experiencing a slowdown in its real estate and manufacturing sectors due to tightening measures by the government.

As a consequence, it has resulted to an excessive supply of iron ore in the steel industry.

The companies' average rate of profit in selling steel products was only 2.99 per cent in the period, significantly lower than that of the country's other sectors, the China Iron and Steel Association said.

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