China on Monday signalled a softer stance in its protracted iron ore negotiations with global miners, when it announced a face-saving deal with Australian minerFortescue Metal.

Fortescue has agreed to cut its iron ore prices by 35 per cent from last year’s levels – less than the 45 per cent cut that China has been seeking from its traditional iron ore suppliers. Those miners – Vale of Brazil, Rio Tinto and BHP Billiton – have already agreed to cut prices by 33 per cent for steel mills in Japan, Taiwan and South Korea and have resisted Beijing’s calls for deeper cuts.

China has been forced to modify its demands in the face of a sharp rise in spot ore prices. Last week, spot ore hit $110 a tonne, double the April low of $58 a tonne.

The deal came at a high price for China, analysts said. They noted that the Fortescue deal had several exceptional characteristics. First, China has agreed to provide Fortescue with up to $6bn in financing that will allow the Australian miner to expand its production and, second, the deal only runs for six months.

Xianfang Ren, of consultants IHS Global Insight in Beijing, said China has “basically bought the deal, as it has pledged generous financing terms”.

The contract represents a small drop in China’s ore needs. The Australian miner said it would supply 3.3m tonnes monthly, but in July alone China imported a record 58.1m tonnes.

“In terms of meeting China’s short-term iron ore demand, the deal with Fortescue is obviously insignificant,” Ms Xianfang said. She acknowledged, nonetheless, that it was a “psychological victory by the Chinese” in the annual price talks. Zhou Xizeng, steel analyst with CITIC Securities, added: “This price rate is symbolic.”

Under the traditional system that has been in place since the mid-1960s, the first annual price agreed between a big miner and a steelmaker became a benchmark followed by the rest of the industry for 12 months. But this system is now breaking apart.

For the first time ever, China on Monday hinted that the era of annual negotiations might be coming to an end, promising Fortescue a leading role in the 2010-11 discussions only “if the annual pricing negotiation is conducted”.

China Iron and Steel Association, Beijing’s top ore negotiator, claimed victory in its long drawn-out battle with miners. “Chinese iron ore price talks have achieved an important and periodical success,” Liu Zhenjiang, Cisa vice-chairman, said.

Shan Shanghua, Cisa’s secretary-general, said the government-backed body would now negotiate with the other three miners using the Fortescue price as a reference. Rio Tinto, however, immediately said the new deal was irrelevant. BHP Billiton and Vale declined to comment.

Chinese steelmakers have already bypassed Cisa’s control of the talks, signing “provisional” price agreements with Vale, Rio Tinto and BHP Billiton at a 33 per cent discount. The industry, led by Baosteel, China’s largest steelmaker, appears also to be moving to regain control of the negotiations, after Cisa stepped in this year for the first time.

Industry observers said the agreement provided the embattled Cisa with badly-needed support amid growing domestic criticism.

The negotiations, which have gone well past the June 30 deadline, have become particularly tense since China detained four Rio Tinto staff in Shanghai last month.

I think its the end of the one year contracts and will add a lot of volatility to the market.Lets see how the big boys(Vale,Rio and Bhp) tackle this problem.Needless to say that the Chinese will gladly use the smaller producers to obtain their goals.

Respectfully,

Inca.

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