UPDATE 2-China industry group attacks Rio iron ore sales

(Rewrites, adds comment, details)

By Alfred Cang and James Regan

SHANGHAI/SYDNEY May 15 (Reuters) - China's steel mills and trading companies on Thursday were urged to boycott iron ore mined by Rio Tinto Ltd/Plc (RIO.AX)(RIO.L) and sold in spot markets as negotiations drag on over long-term contracts.

The China Iron and Steel Association in a statement said it suspected Rio, one of China's biggest ore suppliers, was intentionally diverting ore to the higher-priced spot market.

"We call on all Chinese steel mills and all trade companies importing iron ore not to support or participate in Rio Tinto's activities to promote spot iron ore trade in the Chinese market," the association said in a statement.

Rio's iron ore chief, Sam Walsh, said Rio had lived up to its contracts and would continue to negotiate long-term supply contracts for its ore in good faith. [ID:nSP170138]

"As with any other iron ore supplier, Rio Tinto is entitled to sell into the spot market. To suggest joint action by the Chinese steel industry to prevent this is a very concerning development," Walsh said through a spokesman.

It is the second time this year the Australian miner has irked its Chinese customers as it presses for higher prices for its ore over competitors.

Chinese steel mills have helped bankroll other Australian miners such as Fortescue Metals Group FGM.AX and Gindalbie Metals (GBG.AX) and Atlas Iron (AGO.AX) in exchange for supply pacts to reduce dependence on Rio and its close rival BHP Billiton Ltd (BHP.AX) (BLT.L), although none of these come close to providing the hundreds of millions of tonnes of ore China must import.

The mills have also voiced opposition to BHP's $147 billion takeover offer for Rio, saying a combined group would hold far too much sway over ore prices. Rio's board has rejected the offer, though BHP is pressing to win over Rio's shareholders.

Both companies are spending hundreds of billions of dollars to dig new mines in Australia to meet China's ever-growing need for ore.

SPOT SALES

Spot iron ore sells for almost double the price of long-term contracts. Rio has been threatening to sell more on spot as long-term contract negotiations stall over freight premiums the miner says it deserves.

So far this year Rio has sold around 15 million tonnes of ore at spot prices, compared with little or none in previous years.

"Rio Tinto can understand that when the market is as tight as it is, mills would want to maximise their volumes from Rio Tinto," Walsh said. "However, Rio Tinto remains determined to achieve a fair pricing outcome for its shareholders."

The China Iron and Steel Association said in a statement on its website Rio had failed to execute its agreement with Chinese buyers seriously.

It said Rio Tinto filled only 86.24 percent of its long-term contracted supply with Chinese firms in 2007 and 88.24 percent in 2006.

"One cannot help but suspect that deliveries of long-term iron ore supplies were intentionally reduced while a portion of the supplies was transferred to the spot market for immediate gain," the association said.

Walsh said Rio, which also competes with Brazil's Vale VLE5.SA (RIO.N) in iron ore, had the right to reduce volumes sold under long-term contracts.

Spot iron ore sells for about $180 a tonne, versus around $108 based on Vale's latest agreements. Freight rates from Australia to China are about half those from Brazil.

China delayed issuing permits to import spot iron ore from Australia in March, upping the stakes in the price negotiations, which are normally bedded down by April 1 each year. (Editing by Quentin Bryar)