Chinese authorities are detaining Rio Tinto Ltd's top iron ore negotiator on suspicion of espionage and stealing state secrets, Australia said on Wednesday, threatening to strain already fraying ties.

Details about the detention of Stern Hu, as well as three other Rio employees, emerged just as a Shanghai paper reported Chinese steel mills have finally given in on annual iron ore prices, conceding to a 33 percent cut for six months, although both Rio Tinto and Chinese executives said talks were ongoing.

It was unclear whether there was any tie between the two, but the detention follows a period of increasingly tense relations between the two vast trading partners, with iron ore negotiations running past the June 30 deadline and Rio snubbing a planned $19.5 billion investment by Chinalco last month.

I see no basis in any of that speculation, Foreign Minister Stephen Smith told reporters in Perth in response to talk the move was related to iron ore or the Chinalco deal.

Smith also said he was very surprised by the detention and reasons for it and that the Australian government was still trying to seek access to Hu. He said there was the prospect Hu could be charged with criminal offences under Chinese law.

Rio, which first confirmed the detentions a day ago, said it was aware of the allegation.

We have been advised by the Australian government of this surprising allegation. We are not aware of any evidence that would support such an investigation, a Rio spokeswoman said.

Rio said the Shanghai office where the detained staff worked was mainly a sales and marketing operation for the company, the world's second-biggest iron ore producer.

On June 5, Rio announced it had dumped plans for a $19.5 billion investment from state-owned Chinese metals firm Chinalco and instead sealed an iron ore joint venture with rival BHP Billiton.

Several days later, China's official Xinhua news agency slammed Rio's perfidy for scrapping the deal.

IRON ORE DEAL SAID

The intrigue over the four Rio Tinto employees threatened to eclipse the potentially bigger news of Chinese steel mills finally backed down on iron ore prices, agreeing to the same 33 percent price cut that Japanese and other mills accepted, according to a report in the Shanghai-based China Business News.

A deal would conclude some nine months of tense negotiations that threatened to scupper the decades-old annual pricing ritual and would frustrate China's efforts to wield more clout on global commodity markets, even where it is the dominant buyer.

But a Rio Tinto spokesman and several Chinese executives said negotiations were ongoing, despite widespread industry talk that of an agreement reached this week. Officials from the China Steel and Iron Association declined to comment earlier in the day.

I've checked around this afternoon and there's still no deal so far, still negotiating, Tian Zhiping, vice general manager of the Hebei Iron and Steel Group, told Reuters. Dow Jones Newswires quoted Xu Lejiang, president of China's biggest steelmaker Baosteel, as saying talks were still going on with

CISA.

We've announced with Japan and other countries, but not with China, we haven't confirmed anything there, London spokesman Nick Cobban said. When asked if negotiations with China were still under way, he replied: Yes, that's my understanding.

BHP had no comment on the report.

But a 33 percent cut would be in line with what analysts have been expecting as Rio Tinto showed no inclination to relax its take it or leave it stance on the initial deal, and an economic recovery lifted spot market prices above new contract levels, leaving China with little leverage.

It's a report but it is certainly the deal that we expect to be done. It always seemed likely that the outcome would be no change from Japanese settlement, said Mark Pervan, a senior ANZ commodities analyst.

The paper, which is backed by the local government, said Chinese mills had agreed to the new prices for only six months from April instead of the usual 12, and had already begun negotiating on the next phase.

It said China had agreed to pay $0.97 per dry metric tonne unit for Pilbara blend fines and $1.12 per dmtu for Pilbara Blend lump for April through October, but said its sources could not say which of the big iron ore suppliers had signed the deal.

China, the world's biggest steel producer and buyer of more than half of all traded iron ore, had initially sought a bigger price cut of up to 45 percent, but last week softened those demands after the June 30 deadline for agreeing terms lapsed, giving miners the right to suspend term deals.

RELIEF IT'S OVER

An agreement will provide more certainty for miners' revenues and is likely to come as something of a relief to Chinese mills such as Baosteel and Hebei that had feared paying rising prices on a fickle spot market.

The mills have started to pre-empt this move; Baosteel kept its (steel) prices on hold for its main products so they were obviously preparing for this outcome, said Pervan.

If confirmed, the six-month deal would mean Chinese mills have the chance to argue for cheaper rates if a tentative economic recovery that has revived steel prices falters.

With a mechanism to review prices more frequently, the vast 800 million tonne a year iron ore trade moves a small step toward becoming a more liquid commodity market, which would give miners more opportunity to profit from rising prices and open up trading and hedging opportunities for global banks.

The end-point for this inevitable evolution of iron ore's trade is the ascendancy of price indices ... Such a price mechanism will be increasingly in demand by this trade, as it continues to attract greater numbers of producers and consumers, Price at Merrill Lynch said.

(Reporting by Tom Miles, David Stanway, Nick Trevethan, Rob Taylor, Denny Thomas and Mark Bendeich; Writing by Miyoung Kim and Jonathan Leff; Editing by Clarence Fernandez and Jeremy Laurence)

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