Australian PM says world watching China spy case

By Koh Gui Qing

SYDNEY (Reuters) - Australian Prime Minister Kevin Rudd warned China on Wednesday it had significant economic interests at stake in detaining an Australian mining executive on spying charges and the world was watching how it handled the case.

Confidence in China's ties with Australia, its biggest supplier of natural resources, and the iron ore trade in particular have been threatened since China detained four of Anglo-Australian miner Rio Tinto's staff on July 5.

One part of the row may be quietly put to rest after sources said the two major miners, Rio and BHP Billiton, had secured tacit agreement with Chinese mills for a 33 percent price cut in iron ore, the same deal agreed with other Asian customers in May, effectively winning the marathon pricing battle.

The sources, including people on both sides of the negotiations, said some mills had agreed to a six-month contract and some a year, but there would be no formal announcement by the China Iron & Steel Association (CISA), which represented big Chinese steel makers in this year's talks.

China's steel makers had wanted an even bigger cut, of 40 percent, demanding that Rio and BHP, the world's second- and third-biggest iron ore miners, take term prices back to 2007 levels. That would still leave prices at their second-highest ever, despite a collapse in world steel demand.

CISA officials were not immediately available to comment on the deals and one of the sources said it would not formally confirm anything unless the miners did first.

But the lack of a formal, long term settlement still leaves a great deal of uncertainty and rancour, and a sudden drop in spot vessel bookings from Australia to China may keep tensions high.

$14 BILLION TRADE

The Shanghai-based staff of Rio, including its top iron ore salesman there Australian Stern Hu, are accused of stealing state secrets from Chinese steel mills that could be used to gain an advantage in negotiations over annual iron ore prices.

The detentions have raised concerns about Australia's $14 billion (8.5 million pounds) iron ore trade with China and the broader risk of doing business in the world's third-largest economy.

Mandarin-speaking Rudd, under intense domestic pressure to show he has pull with Beijing, noted Australia's huge economic interest in China but said it wasn't a one-way street.

"I also remind our Chinese friends that China too has significant economic interests at stake in its relationship with Australia, and with its other commercial partners around the world," Rudd told reporters at an impromptu news conference.

"A range of foreign governments and corporations will be watching this case with interest and will be watching it very closely, and they will be drawing their own conclusions as to how it is conducted."

Rudd said he would pursue every avenue to free Hu in a case that has cast a shadow over bilateral trade worth $53 billion last year. China is Australia's biggest trade partner.

Chinese steel mills have been buying record volumes of Australian ore for their blast furnaces from spot markets since late last year after spot prices fell far below long-term rates, but this month they abruptly shifted to buying from India and Brazil in a move that threatens to add more strain to ties.