Miners big and small bank on China's hunger for high-grade iron ore

* Australian prospector looks to high-quality iron ore market

* China’s pollution crackdown ignites demand

* Fortescue aiming for bulk of output to be high-grade ore

SYDNEY, Dec 20 (Reuters) - China’s aggressive campaign to clean its skies by clamping down on polluting steel mills has fuelled a need for high-grade iron ore, and a prospector in the Australian outback is hoping that will help fund an ambitious plan to develop a full-scale mine.

More Chinese mills are opting for high-grade iron ore to boost productivity and limit emissions, opening the door wider for suppliers of better quality ore to the world’s biggest buyer.

Carpentaria Resources needs A$25-A$30 million ($19-$23 million) for a feasibility study on the company’s high-grade Hawsons mine in South Australia, and managing director Quentin Hill said potential financiers are not scarce.

“In October, we had multiple parties looking at the project,” Hill told Reuters.

“I’ve since returned from China and the Middle East, where there has been a surge in support to assist us with product development,” he said.

Hill said the mine would produce pulverised ore containing a higher-than-normal 70 percent iron that could be fed directly into furnaces as pellets, or sphere-shaped high-quality ore that typically fetches a premium over the sandy iron ore fines.

The spot price for iron ore pellets .IO65BP-CNO=MB topped $125 a tonne in early November, double the price of benchmark 62-percent iron ore fines .IO62-CNO=MB at that time, according to Metal Bulletin.

Hill estimates it will cost A$1.4 billion to get the mine up and running.

China is forecast to increase its pellet imports by 70 million tonnes over the next 10 years, CRU consultancy said.

The annual global supply of pellets has been cut by 30 million tonnes since the closure of the Samarco mine in Brazil in November 2015 by partners Vale and BHP due to a major dam burst and environmental disaster.

To stem the loss, Vale in October announced plans to restart three pelletising plants in Brazil that have been idled for several years: the 7 million tonnes-per-year Sao Luis plant in mid-2018, and two smaller plants, Tubarao I and II, possibly in early 2018.

Also in Brazil, Anglo American is awaiting delayed government approvals to enter the third and final stage of expansion at its Minas Rio mine, which supplies pellet feed. Without the approval the mine will run dry next year.

“There is new competition for scarce pellet feed across all markets,” Hill said.

The highest-grade producers of up to 65 percent iron ore, Vale and Rio Tinto have been the main beneficiaries of the price premium, while BHP has seen some of its ore discounted by 8-13 percent and Fortescue Metals Group by around 30 percent.

Fortescue is pushing to ensure majority of the 170 million tonnes it mines annually will have higher grades as it replaces depleting deposits with new ones.

“We are looking at pathways to achieve a target of the majority of our product being above 60 percent iron,” Fortescue Chief Executive Nev Power said in a statement emailed to Reuters.

Similarly, as old mines run dry, BHP and Rio Tinto are replacing them with higher grade operations.

“Even though there has been capacity reduction in China, it’s actually moving that production from inefficient environmentally polluting mills to ones that are more efficient,” said Chris Salisbury, chief executive of Rio Tinto’s iron ore division.

“To do that they need to lift output. To lift output they need higher-grade iron ore, and that’s what we’re seeing,” he said. ($1 = 1.3058 Australian dollars)

Reporting by James Regan; Editing by Manolo Serapio Jr.