ANALYSIS-As China probes Rio, BHP quietly pushes iron ore index

* BHP offers Asia customers a choice: index or carryover

* Latest effort to drive more contracts to spot pricing

* Mills resist for now, but pressure building

By Miyoung Kim

SEOUL, July 14 (Reuters) - While the global steel industry is riveted to the intrigue surrounding Rio Tinto and its iron ore negotiations with China, miner BHP Billiton is quietly pushing its own index pricing agenda with bedrock Asian customers.

In its latest attempt to break down the decades-old benchmark system, BHP (BHP.AX) (BLT.L) gave customers in Japan and South Korea a choice: pay up for iron ore supplies that were ordered but not delivered last year, or write off unsold volumes and switch the contract to prices based on market-based indices.

As a result, at least some customers have been unable to finalise new contracts for the April to March 2010 period, even after agreeing to the same 33 percent price cut versus last year that Rio Tinto set as the industry's early benchmark in May.

"An annual iron ore deal with BHP hasn't been agreed yet due to differences over how to settle carry-over amounts but we expect to conclude negotiations this month," Kwon Young-tae, executive vice president of raw material procurement at the world's No. 6 mill, POSCO (005490.KS), told reporters on Monday.

"We hope to agree on prices with BHP at a similar level that we have already signed with Rio Tinto," he added.

Under iron ore contracts that normally span a decade, mills and miners agree at the start of each year how many tonnes of ore will be sold; in the previous 2008/09 period, however, many mills ultimately took far less than agreed due to the collapse in demand that forced some to cut production by as much as half.

BHP now says they must agree to fulfill their previous contract purchases -- at last year's record-high prices -- before moving on to this year's supplies, which are some $30 cheaper per tonne, unless they are willing to change the terms to spot price indices.

For the moment there seems little doubt that the traditional buyers -- more conservative than their Western or Chinese peers and fearful of ceding more control to three miners that own 70 percent of the world's traded ores -- will choose to pay up for old tonnage rather than abandon the fixed price mechanism, but BHP's move underscores the growing pressure on the benchmark.

"That has made it difficult for Asian mills to wrap up this year's benchmark deals, although they are likely to go for the second option as they have prefered to keep the benchmark system in place," said the source close to the matter.

BHP, the world's No.3 iron ore miner after Vale (VALE5.SA) and Rio Tinto (RIO.AX) (RIO.L), has yet to decide which iron ore indices it wants to use for pricing and is open to discuss it with Asian customers, the source said.

For more details on indices click: [nSIN377598]