China steel mills warned to avoid index pricing-paper

SHANGHAI, Dec 25 (Reuters) - China Iron and Steel Association (CISA) warned the country's steel mills to stay away from index pricing in next year's iron ore supply deals, the Shanghai Securities News reported on Thursday.

Chinese mills have been attracted by an index-based pricing system supported by BHP Billiton (BHP.AX)(BLT.L) among other miners, which would adjust prices on a more regular basis or based on the spot market, as such prices are currently lower than this year's term price, the paper said.

But the association warned steel mills that if they agreed to such a pricing scheme they would risk losing their iron ore import licences.

Shan Shanghua, secretary general of CISA, said it was understandable that steel mills had recently turned to the spot market due to the difficulties of carrying out term contracts, but China will insist on annual supply contracts with fixed prices for the year starting April, 2009.

China's steel sector has felt the impact from the economic slowdown. Mills have scaled back production in response to falling prices and high costs.

Baosteel Group, parent of Baoshan Iron & Steel (600019.SS), one of China's top steel makers, will lead Chinese steelmakers in the 2009 talks.

(Reporting by Rujun Shen, Editing by Jacqueline Wong)