The China Iron and Steel Association and Australian miner Fortescue Metals Group Ltd. (FMG.AU) announced a pact Monday which sets iron ore term prices for the six months ending December 30 at levels slightly below the current industry benchmark, though analysts dismissed the deal as a face saver for China which was unlikely to impact the wider industry or become a new benchmark.

In the longer term, however, the arrangement could change the shape of the global iron ore market, which has been dominated by the big three producers - Anglo-Australian miners BHP Billiton (BHP) and Rio Tinto Ltd. (RTP), and Brazil's Vale S.A. (VALE). It has added a fourth player into the equation, giving Fortescue - until now a price-taker from its bigger rivals - a potential role in setting global prices.

Still, Fortescue's relatively smaller size and different ore grades will make it hard for China's steel mills to persuade other miners to accept the new price as a benchmark this year, analysts said. Fortescue, a newcomer with big ambitions in China, produces only around 45 million tons of ore a year, less than what China imports in a single month.

Fortescue's deal is also conditional on the completion of a funding arrangement with Chinese financiers for between $5.5 billion and $6 billion by Sep. 30.

CISA, which represented Chinese steel mills in this year's price negotiations, said the two sides have agreed on a price of 94 cents per dry metric ton unit for iron ore fines, the grade that most Chinese mills buy.

That is about 3% below the 97 cents a dry metric ton unit for the same grade that Rio Tinto and BHP Billiton agreed with Japanese and South Korean steel makers earlier this year. Fortescue will sell iron ore pellets at 100 cents/dry metric ton unit, down 50.42% from 2008 levels.

As the deal is part of an arrangement to secure financing, it is unlikely to have a flow-on effect on spot prices, said Justin Smirk, senior commodities analyst with Westpac in Sydney. Producers have cited strong Chinese demand and rising spot prices as reasons for their refusal to allow deeper price cuts this year.

Fortescue is willing to forego price in return for funding security, given the company is a small player which wants to get itself into position of strength in the longer-term, Smirk said. "Naturally China is going to try and leverage this deal for pricing, but the size of the deal looks too small."

Moreover, the deal only offers China a relatively small discount from the Anglo-Australian benchmark, said Henry Liu, an analyst with Macquarie Research. Fortescue offers an ore grade of 59%, which means it is of a lower quality than the kind offered by Rio or BHP, he said.

"At the kind of ore grade Fortescue offers, the free-on-board price of 94 cents amounts to about $55 a metric ton of ore," Liu said. "The other Australian miners are offering $57-$58 a ton. So the discount is really not that big."

Also, Fortescue supplies only China, while other miners have already struck benchmark deals in Japan, Korea and Europe, and can't change their contract terms willy-nilly, so it's unlikely they will take Fortescue's cue, Liu said. "This is more of a face-saving issue for China."

Rio Tinto was quick to dismiss the development, saying the deal won't have any bearing on its own price talks with China. "We do not see this pricing agreement as relevant to our pricing for fiscal 2009," a Rio Tinto spokesman said. "Rio Tinto conducts its own negotiations with its customers worldwide. Whether and how other producers reach their own agreements is up to them."

BHP declined to comment.

 
   Chinese Govt Endorses Deal With Fortescue

Fortescue Chief Executive Andrew Forrest said the deal breaks the market impasse that had enveloped the Chinese steel industry, creating uncertainty and increasing risk for individual companies.

And the Chinese government was quick to endorse the deal, saying it could lead to a more balanced outcome for Chinese mills and global miners.

"The iron ore deal reflects adequate negotiations on both sides," Commerce Ministry Spokesman Yao Jian said at a press briefing.

It is the first time Fortescue is setting a term price for its ore and, in a departure from the past, the price is valid only for six months, with the terms to be renegotiated after that.

The deal is a small step forward for China which is yet to agree on this year's term prices with bigger miners which control around 70% of the global sea-borne trade in iron ore. In the past, the big three have taken the lead in setting prices, which are usually for the full contract year starting April 1.

The contract with Fortescue runs from July 1 through Dec. 31, 2009, CISA said, adding it will start iron ore negotiations for the 2010 term in December.

Announcing the deal at a news conference, CISA said it hoped the terms of the deal will be accepted by the big three miners. "We need to (talk) further with other miners," CISA Vice Chairman Luo Bingsheng said.

Despite Rio Tinto, BHP and Vale setting prices with other Asian mills at a discount of around 33% from last year's benchmark for iron ore fines, the Chinese have been holding out for deeper price cuts.

China has insisted that as the biggest buyer of the product, it should have a greater say in pricing decisions.

More recently, price talks have also become entangled in a controversy surrounding China's detention of four Rio Tinto employees on charges of securing information related to price talks using illegal means.

-By Chuin-Wei Yap, Juan Chen and Alex Wilson, Dow Jones Newswires; 8610 6588-5848; chuin-wei.yap@dowjones.com