UPDATE 1-Australia's top iron ore port braces for direct cyclone hit
* All three major Australian iron ore terminals closed
* Port Hedland iron ore terminal prepares for direct hit
* Australia's northwest offshore oil and gas fields shut
* Evacuations start in Port Hedland
By James Regan
SYDNEY, Feb 26 (Reuters) - A powerful tropical cyclone is on course for a "direct hit" on Australia's Port Hedland, which handles a fifth of the world's seaborne-traded iron ore, with evacuations starting on Tuesday ahead of forecast 200 kph (125 mph) winds and torrential rains.
Cyclone Rusty, which is expected to reach Australia's northwest coast on Wednesday, has already closed Port Hedland, halting the loading of millions of tonnes of iron ore, and shut offshore oil and gas fields.
Rusty could strengthen to a category four storm -- on a scale of one-to five -- by the time its reaches the port, according to the Bureau of Meteorology tracking system.
"In this case a direct hit looks likely," said Atlas Iron Managing Director Ken Brinsden, adding the miner had suspended its port operations and evacuated its employees from the area.
"That implies an impact on production," Brinsden said.
BHP Billiton , Fortescue Metals Group and Atlas are forecast to ship more than 275 million tonnes of iron ore this year, or 750,000 tonnes per day, through Port Hedland.
"The Port Hedland Port Authority is fully prepared for the arrival of tropical cyclone Rusty, with all port terminals, infrastructure and services secured and locked down in line with existing port cyclone response plans," port spokesman Steed Farrell said.
A weaker category one system which passed the Pilbara in January forced the shutdown Port Hedland and two other iron ore export terminals, contributing to a nine percent drop in exports for the month and a 5.2 rise in spot prices.
Australia's weather bureau said the cyclone intensity increased to a category three overnight and put the storm at about 170 km (105 miles) north-northeast of Port Hedland.
Despite the approaching cyclone, price offers for Australian iron ore cargoes in China slipped by $1 per tonne on Tuesday, according to Beijing-based consultancy Umetal.
Benchmark 62-percent grade iron ore for immediate delivery to China stood at $151.90 a tonne.
"We would expect at least 5 million tonnes of exports to be impacted by Rusty; the amount of inland flooding will be difficult to estimate ahead of time but could further affect port inflow rates," Standard Bank said in a client note.
A cyclone watch has been issued for inland areas of the Pilbara including the iron ore mining centres of Tom Price, Newman and Telfer, where Australia's biggest iron ore miner Rio Tinto , BHP and Newcrest Mining operate.
The ports of Dampier and Cape Lambert, about 200 km (125 miles) south of Port Hedland and used by Rio, have also been closed as a precaution against the storm. Rio is targeting shipments of 260 million tonnes of ore through these ports this year.
Rusty could be the strongest cyclone to hit Port Hedland since 2007, when Cyclone George slammed into the town packing winds up to 205 kph (127 mph). George was blamed for the deaths of two Fortescue workers and caused significant damage to the town and isolated mining camps in the region.
The Department of Fire and Emergency Services warned residents in low lying areas of Port Hedland to evacuate.
"Rapid and powerful flooding is very likely as severe tropical Cyclone Rusty crosses the coast," it said. About 14,000 people live in Port Hedland and adjacent South Hedland.
Local media reports described a run on canned foods and emergency supplies, like batteries and flashlights, with images of empty supermarket shelves and deserted streets.
Shelters have also been set up to house people living closest to the coast, with winds up to 120 kph (75 mph) reportedly already belting the area.
Meteorologists warn there is a risk that as Rusty nears the coast, it may stall and swing a bit further to the west and bring destructive wind gusts closer to the oil services hub community of Karratha near Dampier and Cape Lambert ports.
A second potential cyclone may be developing to the southeast of the Cocos Islands in the Indian Ocean and northwest of Australia, according to the Bureau of Meteorology.
The Cocos Islands is part of Australia, but is located closer to its northern neighbour Indonesia.