China'ssteel mills and trading companies on Thursday were urged to boycott iron oremined by Rio Tinto Ltd/Plc and sold in spot markets as negotiations drag onover long-term contracts.

The ChinaIron and Steel Association in a statement said it suspected Rio, one of China's biggest ore suppliers, wasintentionally diverting ore to the higher-priced spot market.

Wecall on all Chinese steel mills and all trade companies importing iron ore notto support or participate in Rio Tinto's activities to promote spot iron oretrade in the Chinese market, the association said in a statement.

Rio's iron ore chief, Sam Walsh, said Rio had lived up to its contracts andwould continue to negotiate long-term supply contracts for its ore in goodfaith.

Aswith any other iron ore supplier, Rio Tinto is entitled to sell into the spotmarket. To suggest joint action by the Chinese steel industry to prevent thisis a very concerning development, Walsh said through a spokesman.

It is thesecond time this year the Australian miner has irked its Chinese customers asit presses for higher prices for its ore over competitors.

Chinesesteel mills have helped bankroll other Australian miners such as FortescueMetals Group and Gindalbie Metals and Atlas Iron in exchange for supply pactsto reduce dependence on Rio and its close rival BHP Billiton Ltd, although none ofthese come close to providing the hundreds of millions of tonnes of ore China must import.

The millshave also voiced opposition to BHP's $147 billion takeover offer for Rio, saying a combined group would holdfar too much sway over ore prices. Rio's board has rejected the offer, though BHP is pressing towin over Rio's shareholders.

Bothcompanies are spending hundreds of billions of dollars to dig new mines in Australia to meet China's ever-growing need for ore.


Spot ironore sells for almost double the price of long-term contracts. Rio has been threatening to sell moreon spot as long-term contract negotiations stall over freight premiums theminer says it deserves.

So far thisyear Rio has sold around 15 million tonnesof ore at spot prices, compared with little or none in previous years.

RioTinto can understand that when the market is as tight as it is, mills wouldwant to maximise their volumes from Rio Tinto, Walsh said. However,Rio Tinto remains determined to achieve a fair pricing outcome for itsshareholders.

The ChinaIron and Steel Association said in a statement on its website Rio had failed to execute its agreementwith Chinese buyers seriously.

It said RioTinto filled only 86.24 percent of its long-term contracted supply with Chinesefirms in 2007 and 88.24 percent in 2006.

Onecannot help but suspect that deliveries of long-term iron ore supplies wereintentionally reduced while a portion of the supplies was transferred to thespot market for immediate gain, the association said.

Walsh said Rio, which also competes with Brazil's Vale in iron ore, had the rightto reduce volumes sold under long-term contracts.

Spot ironore sells for about $180 a tonne, versus around $108 based on Vale's latestagreements. Freight rates from Australia to China are about half those from Brazil.

China delayed issuing permits to importspot iron ore from Australia in March, upping the stakes in theprice negotiations, which are normally bedded down by April 1 each year.(Editing by Quentin Bryar)

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