Chinese iron ore stockpiles are receding to more normal levels, global miner BHP Billiton Ltd said on Wednesday, adding a cautious note to its outlook for one of the world's hottest commodities.

Analysts calculate mountains of ore are still scattered across Chinese ports -- about 75 million tonnes, enough to meet domestic demand for more than two months -- though record imports this year suggest consumption is also running high.

Ian Ashby, head of iron ore for BHP Billiton, the world's third-largest producer of the steel-making raw material, said China had finished rebuilding its iron ore stockpiles and port stocks were starting to settle back to more normal levels, typically enough to sustain a month of consumption.

The spot price for widely used 63.5 percent grade iron ore topped $100 per tonne cfr China this week for the first time since October 2008, underscoring China's hunger for imported ore, according to analysts and traders.

Speaking to reporters after addressing the Diggers and Dealers mining conference, Ashby said the latest rise had created a 25 percent premium for spot sales over the Australian benchmark.

BHP Billiton is pushing its customers to ditch the benchmark in favour of quarterly indexed price-setting based on average spot prices.

The company was running its Australian iron ore mines and shipping business at full throttle and will continue to do so as it readies new lodes to boost supply to 155 million tonnes from 129 million tonnes now.

Ashby dismissed concerns among some analysts that shipments to China had dropped off in recent weeks after Chinese authorities arrested four iron ore employees of Rio Tinto (RIO.AX: 行情) on allegations of espionage.

BHP Billiton and Rio are proposing a joint production partnership of their iron ore businesses.

It's not a matter of not being concerned, but our business is functioning as normal in China. That is fact, Ashby said.

Chinese steel production has recovered quite rapidly -- last month it reached record highs, he added. Most of this has been due to China's stimulus packages.

DJ Carmichael & Co mining analyst James Wilson said he expected iron ore demand in China to continue to pick up.

The iron ore going through those ports isn't just sitting around, it's actually being consumed, Wilson said.

Ashby declined to comment on current price negotiations over iron ore supplies to China.

BHP Billiton is trying to persuade customers to replace the current benchmark system of pricing iron ore, where annual prices are set entirely by negotiation, in favour of a more market-based model that relies on spot and index pricing.

The current pricing debacle with China's steel industry has not hampered Australian small-cap firms' negotiations with the world's largest steelmaking country, however, and they have settled prices using methods that satisfy their Chinese customers. [ID:nHKG254201]

BHP Billiton has already sold 30 percent of its iron ore on spot-index pricing or through quarterly contracts. Tonnage accounting for 47 percent of its sales volumes had yet to be priced for the fiscal year to March 2010. (Editing by Clarence Fernandez)

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