UPDATE 2-Rio Tinto says China iron ore talks inactive

Fri Sep 4, 2009 8:55am BST

Quotes

   

* Rio says no activity in iron ore contract talks with China

* Iron ore chief cites detention of Rio employees in China

* Provisional pricing at Japan-S.Korean benchmark continues (Adds details, quotes)

By James Regan

SYDNEY, Sept 4 (Reuters) - Rio Tinto (RIO.AX) (RIO.L) has ceased attempts to forge an annual fixed iron ore price with Chinese steel mills, the firm said on Friday, but it denied media reports it was due to the detention of its negotiators in China.

News that negotiations were essentially dead for now was little surprise to analysts given both sides' intransigence, with the world's No. 2 iron ore producer sticking with the 33 percent reduction it agreed with Japanese and South Korean mills in May while China's industry body dug in its heels for a bigger cut.

But the public acknowledgement of the halt showed Rio was not rushing back to the negotiating table even after spot iron ore prices fell 25 percent from their 2009 peak, and suggested that there was a growing risk that this year's talks may never formally conclude, a further erosion of the 40-year-old system.

Earlier in the day the Australian Associated Press reported that Rio Tinto's iron ore head, Sam Walsh, had told reporters that the talks had been suspended because of the contentious detention of four Shanghai-based Rio Tinto employees -- including lead China negotiator Stern Hu -- on allegations of commercial espionage, but a company spokesman denied this.

"Sam Walsh acknowledged there were no talks actively underway at the moment. The benchmark price was set months ago," a Rio Tinto spokesman told Reuters.

"It's got nothing to do with Stern," the spokesman added.

Rio Tinto and fellow Australian iron ore miners BHP Billiton (BHP.AX)(BLT.L) and Fortescue Metals (FMG.AX) have said mining and shipping of ore to China have not been affected by the detention of the Rio workers, and freight fixtures show that traffic continues apace, despite a brief pause.[ID:nSEO259287]

Earlier in the day AAP quoted Walsh as saying after a business function in Perth: "At this point in time we're not negotiating... Remember we have our negotiators detained."

NO DEAL?

Regardless of the reason, the absence of a price agreement with the Chinese was becoming less relevant as the ore was being "provisionally" priced anyway at the Japanese and South Korean rates, which were agreed for the year to March 31, 2010.

"Maybe the year ends without an agreement and the Chinese simply pay the same as the Japanese under the banner of a provisional price, then live to negotiate a fresh contract next year," said the chief executive of a small-mining company that also sell ore to China and asked not to be named.

Last month, the semi-official China News Service reported that China had suspended iron ore talks with Australian miners but then it quickly withdrew the story.

The report, which the agency later said was based on a false research report, sowed confusion and uncertainty in an industry that has been in flux for months, as price talks drag long past their deadline and become entangled with the detentions.

Rio Tinto's negotiators were detained and later arrested in an crackdown on speculation in the Chinese iron ore trade, amid concerns that speculators had been ramping up spot prices and undermining the country's steel industry.

Spot prices raced to around $115 a tonne early in August -- nearly twice the Japanese and South Korean contract price -- but have since tumbled 25 percent in the past three weeks on signs China's steel demand is weakening. (Additional reporting by Mark Bendeich and Miyoung Kim; Editing by Jonathan Leff)