Rio seeks iron ore premium from China mills in likely pricing war revival, sources say

By Manolo Serapio Jr

MANILA (Reuters) - Australian miner Rio Tinto is asking Chinese steel mills to pay a premium for its highest grade iron ore product for the first time since an annual pricing system collapsed in 2010, two sources familiar with the situation said.

The demand by the world's No. 2 iron ore miner comes as Chinese steel producers recover from years of losses, buoying demand for the steelmaking raw material, but could revive tensions between miners and mills over pricing that they seemed to have ditched six years ago.

Rio is seeking up to $1 per tonne more than the index price for its Pilbara iron ore product, or PB fines, from Chinese mills on long-term contracts for 2017, the sources said, in a break from a years-long trend of pricing at spot values. Previously, Rio was selling the ore at a premium only to traders.

The miner has also pushed up the premium it seeks from traders to between $2 and $2.50 per tonne over the index price for the same product for January to April, they said.

That would be a record high and up from a premium of $1.50 for the four-month period through December this year, said one of the sources who works closely with Rio in China.

From Chinese mills, Rio initially sought a 15-cent premium, but this week increased it to about $1, said the same source.

"The steel market is so hot this year and they think it's something that buyers can accept," the source said. "If Rio gets it, other miners may follow."

Rio Tinto declined to comment.

A reduction in China's steel capacity along with a push to spend more on infrastructure has fuelled an 81 percent spike in Chinese steel prices this year, sparking a similar rally in iron ore prices.

'UNFAIR'

After four decades of fixing iron ore contract prices annually, the miners and mills in 2010 began setting them more frequently and in shorter periods against spot index prices such as those published by Platts and Metal Bulletin.

"This is illogical," said the second source on Rio's planned premium for mills. "The index already reflects the spot market, why add a premium?"

The spot index breached $80 a tonne on Monday for the first time since October 2014, gaining 86 percent this year after a three-year slide.

The China Iron and Steel Association (CISA), which groups the biggest steel producers in the world's top market, called the planned price markup "unfair" in a report by Xinhua News on Nov. 18 which did not identify the leading iron ore producer.

Li Xinchuang, vice-secretary general of CISA, said "currently it's not easy to demand" a premium for iron ore from Chinese mills.

"The steel market is still very weak, not only in China but globally," Li told Reuters by phone.

(Reporting by Manolo Serapio Jr.; Additional reporting by Jim Regan in SYDNEY; Editing by Himani Sarkar)