WRAPUP 1-Iron ore talks set for overtime as China holds out

* Iron ore talks down to the wire, 11th hour deal unlikely

* China, Rio stick to their positions, talks set for Weds

* Rio will maintain shipments, but pricing up to customers

* End of 40-year-old annual pricing regime could be temporary

* For more related stories please click: [ID:nSP480484] (Adds details)

By Alfred Cang and Jim Regan

SHANGHAI/SYDNEY, June 30 (Reuters) - China and big miners were deadlocked in 11th-hour negotiations over annual iron ore prices on Tuesday, officials said, likely spelling the end -- at least temporarily -- of a four-decade-old pricing regime.

A source at the China Iron and Steel Association and a senior executive at the country's No.2 steel mill both said the negotiations are likely to continue past the June 30 deadline for extending annual supply contracts, pushing China, which buys half of the world's traded iron ore, onto the volatile spot market.

Rio Tinto (RIO.AX) (RIO.L) has stuck by that deadline for agreeing on prices for 12-month contracts that run from April 1, showing no inclination to go lower than the one-third price cut it agreed with Japan and South Korea and saying it is ready to sell to its customers on whatever basis they prefer.

It remains to be seen whether the two sides manage to broker a deal in the coming weeks that would allow them to restore the supply security offered by annual contracts, or turn entirely to trading the main ingredient for making steel on the spot market, opening the door to a potentially huge derivatives market.

What is clear is that a last-minute deal is unlikely.

"The two parties are still holding their requests and have not been closing their demands. So I cannot say if there is any room for each party to concede," Tian Zhiping, the vice-general manager of Hebei Iron and Steel Group, told Reuters.

In reality the shift is already underway -- Rio has sold half its ore on a spot basis this year, and No.3 iron ore miner BHP Billiton (BHP.AX) (BLT.L) has long encouraged the development of more market-based pricing to replace the inelastic benchmark.

A greater dependence on spot markets would subject Chinese mills such as Baosteel (600019.SS), Wuhan Iron and Steel (600005.SS) and Hebei (000709.SZ) to greater cost uncertainty than their regional rivals that have stuck with annual prices.

That's a risk the industry is prepared to face in order to drive home its demands for a bigger break on prices after a collapse in steel demand drove many mills into the red, caught between record-high 2008 iron ore and falling steel prices.

"We made a statement in late May that we would not accept the price reached by Japanese steel mills and Rio Tinto, so we will keep negotiating," a source at the lead negotiator China Iron and Steel Association told Reuters. "Therefore, we are still in the negotiations until an official statement is made."

But spot iron ore prices to China have risen by a fifth in just a month, and now trade at a 4-month high above $80 a tonne on a delivered China basis, equivalent to around $65 free on board -- higher than the contract price of $61 that the Japanese and South Korean mills secured, giving miners the upper hand.

RIO: BALL IN CHINA'S COURT

"We will continue to deliver ore to our customers (after June 30) as we have in weeks past and as we will in weeks and month to come, but under what arrangements is something only the customers can decide," Rio Tinto spokesman Gervase Greene told Reuters.

"They want a benchmark system that is well below spot."

Last year, talks dragged on until June 24 before the first deal was struck, but this year China and global miners are so far apart it threatens to end the decades-old annual benchmark.

The negotiating power of China, which wants a 40-45 percent price cut, has been sharply undermined by a recovery in both steel and iron ore prices, and many analysts have predicted talks would continue with the lapse of the deadline.

"I won't be surprised if the standoff continues as price action over the past month does not suggest we will see much change to current market dynamics," said Su Aik Lim of Fitch Ratings in Beijing.

Small Chinese mills, eager to fix production costs and prepare for demand upturn, have already signed private deals, ignoring threats from CISA that it would not recognise the deals and revoke import licenses.

Massive iron ore stockpiles built up in China after record imports this year will provide some immediate buffer for mills if supplies come to an abrupt halt, especially as Europe begins to see a recovery in steel output, which would increase ore demand.

"Under this scenario, the Chinese strategy of not signing a benchmark would backfire," said Merrill Lynch analyst Tom Price.

Exporters in India, historically the biggest source of spot market supply, reported steady demand from China on Tuesday, with the benchmark 63.5 grade of iron ore little changed around $58-$61 a tonne FOB, suggesting no sense of panic buying.

"Chinese inquiries are there, but prices are stable," said a miner cum exporter in India's southern state of Karnataka.

For a Reuters poll on likely outcomes, click [ID:nSP482567]

For a PREVIEW of the talks [ID:nSEO56621] (Additional reporting by David Stanway and Tom Miles in BEIJING, Miyoung Kim in SEOUL and Ruchira Singh in MUMBAI; Editing by Michael Urquhart and Jonathan Leff)