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Stephen Long discusses Rio's supply price sla -

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TONY JONES, PRESENTER: The mining giant Rio Tinto has agreed to a huge cut in iron ore prices in
new contracts with Japan. It's the first time in seven years the price has fallen. It has big
implications for the Australian economy and the Federal Budget.

Joining me with more details is our Economics Correspondent Stephen Long.

Now, Stephen, just run us through these price cuts in the iron-ore (inaudible) - Japanese ones,
anyway.

STEPHEN LONG, ECONOMICS CORRESPONDENT: Tony, yes. Well, Tony, Rio Tinto has accepted price cuts
ranging between 33 per cent and 44 per cent. It's a 33 per cent cut for the cheaper grade stuff
knows as Fines; 44 per cent for the higher grade iron ore product known as iron ore lump. And that
leads to a weighted average cut of 37 per cent. It only pares back some of the gains of recent
years, but it's nonetheless a big fall in anyone's language.

TONY JONES: The question is whether it's made up by volume of sales, of course, and - but I'm
wondering what this means overall for the already stressed out Australian Budget.

STEPHEN LONG: It's hard to say precisely, both because the price and the volume will affect things.
But also because Treasury didn't publish an estimate of what it thought the iron ore price would be
and it won't say now what its estimate was - apparently it's a trade secret. But, Wayne Swan, the
Treasurer, came out today and said that the cuts to mineral export prices will cut Australia's
export income by $50 billion in the coming year, which is huge. And Treasury is looking at a fall
in our terms of trade of 13.25 per cent, which will cut billions of dollars from Government
revenue. Now, the Reserve Bank has come out with an even worse forecast revising its forecast up to
a fall of 25 per cent this calendar year in the terms of trade.

TONY JONES: Stephen, the strange thing is that the sharemarket rallied on the back of these price
cuts...

STEPHEN LONG: It did.

TONY JONES: ...which seems a bit counter-intuitive.

STEPHEN LONG: Well it does, but I think what happened there, Tony, was that the traders are hoping
that this will actually set the benchmark for China, which was hoping to push through even bigger
cuts to the contract prices during its negotiations.

TONY JONES: Will that happen, and if it does, what are the implications? Because our economy seems
to be very heavily reliant on what actually happens with the Chinese recovery or not, whether the
Chinese economy grows a lot faster than we imagine it will.

STEPHEN LONG: Yes, yes. Well, China is a much bigger importer, so it will be hoping to use that
leverage still to get bigger cuts. But it's been shooting itself in the foot somewhat because it's
been stocking up on iron ore, buying on the spot markets, and that's pushed up the daily prices a
little and could undercut its negotiations.

TONY JONES: Well, Stephen, we'll have to leave you there. We thank you very much once again for
trying to explain this all to us, in fact doing it very eloquently. Thank you very much.

STEPHEN LONG: Thanks, Tony.