UPDATE 1-China iron ore imports up on small mill deals

(Adds details, background)

By Alfred Cang

SHANGHAI, April 10 (Reuters) - Deals signed by small Chinese steel makers with overseas suppliers are behind the surge in the country's iron ore imports, the Securities Times newspaper said on Friday.

China said on Friday that it imported a record 52.08 million tonnes of iron ore in March [ID:nPEK9162], signalling that Chinese demand for the raw material remains strong.

Chinese steelmakers are still locked in annual price talks with global mining majors BHP Billiton (BHP.AX)(BLT.L), Rio Tinto (RIO.AX)(RIO.L) and Vale (VALE5.SA), and the surge in imports illustrates their growing dependence on foreign iron ore.

Steelmakers based in northern China's Tangshan are importing iron ore and paying term prices after agreeing their 2009 purchase volumes late last year, the newspaper said, citing executives in the local mills.

"The CIF prices offered by iron ore giants such as Rio Tinto are very attractive," the newspaper quoted a steel mill executive as saying. The steel mill consumes more than 5 million tonnes of iron ore a year and has already booked 2 million tonnes of imported ores.

The supply deals with overseas miners were signed on a monthly basis and also included favourable terms such as payment deferrals and discounts for bulk purchases, the newspaper said.

The contracts involve the delivery of tens of millions of tonnes of iron ore to Tangshan, home of hundreds of mostly small, private-sector steel mills, the newspaper said.

"Currently, the volumes of these contracts cannot be huge, but they will back the Chinese side into a corner during the annual price negotiations," an analyst at Sinosteel Corp, a major state-owned trading house, told the newspaper.

"The rapid increase of iron ore imports signals that China's iron ore demand is strong and that iron ore prices have hit bottom, and therefore, expectations for term iron ore prices (for the 2009-10 contract year) will certainly rise," the analyst said.

REPLACEMENT

Medium- and small-sized steel mills will benefit from the switch to term prices, which are fixed and lower than those on the spot market, the newspaper said, citing an executive from another steel mill in Tangshan.

Ironically, the rapid development of Tangshan's steel industry was partly due to the relatively cheap and plentiful iron ore resources in the region. Analysts have said that margins in these mills were high because of their flexible and efficient operations.

The small mills were rarely considered as potential clients for major overseas miners, which have targeted leading global steel makers like Japan's Nippon Steel (5401.T), South Korea's POSCO (005490.KS) and China's Baosteel (600019.SS) as their main customers.

However, the global financial crisis has slashed steel demand and forced overseas steel mills to cut output, forcing miners to search for new options.