Rio Tinto:Iron ore sales strong, China deal

SYDNEY (Reuters) - Chinese steel mills are paying Rio Tinto spot market prices for its iron ore that are higher than the benchmark, and the company is shipping material at a record rate, a company spokesman said on Monday.

With business and iron ore prices booming, Rio seems to be in the driving seat in talks with Chinese steel mills, who are demanding a cut from 2008 term iron ore costs greater than the 33 percent secured by Japanese and Korean rivals.

"We're selling everything we make, we've never been as busy," Rio Tinto Iron Ore spokesman Gervase Greene said, speaking ahead of the firm's second-quarter output report due on July 15.

"Instead of buying under contract, they just choose to buy at whatever the prevailing rate is on the day. At the moment, that's about $82 so we're selling it at a higher price than if they had agreed so that's where it's at," he said.

"We believe in the benchmark system but if, at the end of the day, customers want to pay spot prices that's up to them," Greene said, adding negotiations were moving slowly.

Rising iron ore prices have weakened China's bargaining position, forcing the world's biggest buyer of the steelmaking ingredient to make its first compromise last week when it said that it was willing to accept less than the 40 percent cut it had been demanding.

Spot prices for iron ore are at four-month highs around $82.50 a tonne delivered in China. That is equivalent to around $65 free-on-board and above the benchmark price of some $61 that Japanese, South Korean and Taiwanese mills pay.

Because of strong spot prices and deals struck with steel mills outside China, analysts believe iron ore miners, including BHP Billiton and Brazilian giant Vale, are not in a position to offer China deeper cuts demanded by the China Iron & Steel Association (CISA).

"Iron ore producers cannot offer China a lower benchmark price than Japanese customers, or risk invalidating the entire negotiation process. A short-term hybrid pricing solution may be announced to save some face for the CISA," Citi analyst Alexander Hacking said.

SURGE IN Q2 OUTPUT

Rio Tinto is expected to show next week that its iron ore shipments picked up in the second quarter as demand from China grew following a 15 percent fall in the first quarter, year-on-year.

First-quarter shipments from Rio Tinto's Western Australian iron ore mines totaled 39 million tonnes, down 9 percent year-on-year.

"Shipments have picked up dramatically since that low point in February-March to run at 15-16 million tonnes a month," said Peter O'Connor, head of metals & mining at Deutsche Bank.

"They're pretty confident they're going to get 200 million tonnes plus (from Australian mines) this year."

Macquarie Group said in a research note on Monday that Rio Tinto's iron ore division generated close to 80 percent of the group's operating earnings in the first half of 2009.

China's imports of iron ore were also running at record levels due to strong Chinese steel production as China increases spending on infrastructure and urban development.

At first glance imports of iron ore appear to have outstripped the requirements of China's steel industry, leading to suggestions that stockpiles may need to be reduced, O'Connor said.

"There may be some destocking in iron ore but everything is telling you the opposite," he said.

"Spot prices have moved higher, freight rates have moved higher, the June iron imports were close to a record rate, the amount of steel made in June was close to June last year, so it's extraordinary."

(Additional reporting by Miyoung Kim in SEOUL; Editing by Michael Urquhart)