Small-capped Australian iron ore miners say it is business as usual with Chinese steelmakers despite protracted negotiations between China and mining giants Rio Tinto and BHP Billiton to settle an annual benchmark price.

The current pricing debacle with China's steel industry has not hampered the small cap's negotiations with the world's largest steelmaking country -- and they have settled prices using methods that satisfy their Chinese customers.

Atlas Iron -- which sells to four different Chinese mills -- uses what it calls a mutual fairness clause to settle prices, Atlas's managing director David Flanagan said on the sidelines of the Diggers and Dealers mining conference in Western Australia.

We've got agreements which are based on a benchmark, but then if the spot price ... varies above or below the benchmark by a certain point amount ... we would average so we'll get half of the upside, but also share half the downside, Flanagan said.

Meanwhile, Grange Resources , in which Jiangsu Shagang Group -- China's largest non-government steelmaker -- has a shareholding, prices its iron pellets according to the price agreed by Vale and Japanese mills at the Brazilian port of Tubarao, Grange's managing director Russell Clark said.

Fortescue Metals Group Ltd also has reported no interruptions to shipments to more than two dozen Chinese steel mills this year.

On Tuesday, Chinese media said the iron ore price talks with Rio Tinto and BHP Billiton were suspended due to spot price distortions, but minutes later retracted the story as a mistake.

China, whose steel mills are burdened by overcapacity, has been holding out for a 40-45 percent price cut, even though Japanese and Korean steelmakers have signed off on a 33 percent steel cut.

China Iron and Steel Association, the defacto negotiator for the country's steel mills in annual term iron ore price talks, said last week that excess iron ore imports were a serious hindrance in this year's negotiations.

China's iron ore imports jumped 29 percent in the first six months of this year to 297 million tonnes, although the pace is expected to slow to around 236 million tonnes in the second half as soaring spot prices encourage the reopening of idled domestic mines.

The current system, which involves annual negotiations between major miners and steelmakers is too rigid and needs to be revised, some executives said.

I personally find the benchmark annual setting too long, Clark said. The benchmark being set every three months? Perhaps that's what happens, which I think will be a nice halfway point. It's liquid but it's controlled.

Spot iron ore vessel bookings from Brazil to China jumped to a record in July and shipments from Australia picked up toward the end of the month, according to data specialist ASXMarine, signaling that demand from the world's top steelmaker remains firm even after record imports in the first half of the year.

As of now, Australia's smaller iron ore miners have been relatively unshaken by the political debacle in China, including the detentions of four Shanghai-based iron ore employees of Rio Tinto over spy allegations.

We've talked in loose terms about the Rio deal in so far as 'it's a shame', Clark said, referring to Shagang.

But as a private company, they tend to run pretty quietly in China -- they don't want to make a lot of noise, Clark said.

(Editing by Ben Tan)