SNAP ANALYSIS: China iron ore strategy leak sows price confusion

By Miyoung Kim

SEOUL (Reuters) - The detention of four of Rio Tinto's China staff now appears to revolve around access to commercial information about the domestic steel industry's negotiating position in annual iron ore price talks, which have yet to be publicly resolved.

The Shanghai office of China's State Security Bureau accused Stern Hu -- Rio's top China iron ore salesman -- and three of the local Rio staff of bribing Chinese steelmakers during the talks, using improper methods and stealing Chinese state secrets, the China Security Journal said.

On Friday, a source with knowledge of the probe told Reuters that Tan Yixin, the head of iron ore imports for state-owned steelmaker Shougang, was also taken into custody on suspicion of "revealing China's negotiation strategy" to Rio.

The latest revelations confirm what many had suspected -- the probe was directly related to the increasingly acrimonious annual rite of negotiating prices for 12-month iron ore contracts, which this year dragged on past the June 30 deadline as both miners and China's steel mills stuck to their guns.

Regardless of what Rio knew about the Chinese position, most market analysts had long believed that the China Iron and Steel Association -- which was leading the talks -- would fail to win anything better than the 33 percent price cut that Rio had set as a benchmark in late May deals with other Asian mills, after which the spot market rallied and the economy brightened.

The question now is what happens to the long-term contracts that still tie Rio, the world's No. 2 iron ore miner, to China, which imports more than half of the world's traded ore. At the moment some of those supplies may be reverting to a spot basis, but at some point the issue of annual pricing must be resolved.

Analysts are initially divided: some believe China may use the probe as a negotiating tactic to win price cuts nearer the 40 percent or better that they had initially fought for; most others say market forces will dictate it eventually accepts the 33 percent cut -- unless it has already done so.

DEAL IS DONE, NO GOING BACK