BHP and Rio drop on China steel fears

The world's biggest mining company, BHP Billiton, says Chinese demand for iron ore is "flattening", creating concerns for the entire sector.

Reuters is reporting that Ian Ashby, President of BHP's iron ore division, said in Australia that: "the (Chinese) economy is shifting, it's changing. Steel growth rates will flatten and they have flattened."

This is significant both for the iron ore miners like BHP and its great rival Rio Tinto who must decide whether to continue with expansion programmes at their mines; and for shareholders who will wonder whether mining stocks are really the place to be.

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BHP shares had dropped 2.8% by 09:45; Rio was down by 3.6% at the same point.

The real problem is that in relative terms the Chinese economy is slowing, with 2012 gross domestic growth expected at 7.5%. This is the weakest growth in eight years.

Both Rio and BHP have reiterated that they will continue with expansion programmes given the current price of iron ore has hovered between $130 and $147 per tonne since December.

BHP thinks the "floor" for the price is $120 per tonne and, although China may not be growing quite as quickly as in recent years, there are still 100m Chinese expected to migrate from the countryside to cities. They need somewhere to live, and those flats and houses will need iron ore.