Perth-based miner Mount Gibson Iron Ltd. (MGX.AU) said Friday it has set its contract iron ore prices in line with the price cuts agreed between Rio Tinto Ltd. (RTP) and Nippon Steel Corp. (5401.TO) earlier this week.

The announcement could mark the first acceptance of the Rio/Nippon price as a new benchmark by a Chinese steelmaker, as Mount Gibson's customers include China's sixth biggest steelmaker: Shougang Corp. (SHGG.YY).

Mount Gibson Managing Director said all of the company's long-term iron ore contracts are set in line with the price Rio Tinto achieves for its Hamersley product, which has now been set for the year in the agreement with Nippon Steel.

"Our customers are obliged under the contract to pay us the Hamersley price," he told Dow Jones Newswires.

"The customer doesn't have the ability to come back and say they don't want to pay that price. That is the price."

Tonkin said customers Shougang and APAC Resources Ltd. (1104.HK) had been advised of the price settlement.

"They have acknowledged the fact that a price has been settled," he said.

Shougang wasn't immediately available for comment.

Rio and Nippon this week agreed cuts of between 33% and 44% in a settlement that would normally set a benchmark to be applied across the industry, but Chinese steelmakers have been seeking deeper cuts and haven't yet settled their contract prices with miners.

Merrill Lynch analyst Tom Price said the settlement of Mount Gibson's prices doesn't mean that other Chinese mills will fall in line with the Rio/Nippon price.

Talks between Chinese mills and the miners are continuing and the mills aren't worried about holding out as they can buy on the spot market at prices about 30% to 40% below last year's benchmark, he said.

However, Mount Gibson's Tonkin said he expected larger steel mills in China would be keen to settle at the Rio/Nippon price to give them certainty of supply for the large quantities of high-quality ore they require.

"My view is that those large steel mills that require quality feed and large volume will be looking very seriously at falling into line," he said.

Rio Tinto Iron Ore Chief Executive Sam Walsh told analysts last month that some of the miner's long-term contracts contained "drop dead" clauses that could allow them to be dissolved if agreement on pricing isn't reached by June 30.

Tonkin said big steelmakers would be aware of the expiration clauses in long-term contracts and that if they were forced instead to buy their ore on the spot market prices would be driven higher.

The head of another iron ore miner, Fortescue Metals Group Ltd. (FMG.AU) Chief Executive Andrew Forrest, made similar comments Thursday when he warned that Chinese steelmakers could be stuck buying ore on the spot market "for all time" if they didn't accept the new benchmark price.

Shougang and APAC agreed to take up iron ore purchases from Mount Gibson as part of a wider bail-out package after several of its customers defaulted on long-term contracts last year amid sagging demand and prices.

Under that agreement, they will pay US$56 per wet metric ton, which equates to 95 U.S. cents per dry metric ton unit, until July 1, when they will start paying the Hamersley price, which has been set at 97 U.S. cents per dry metric ton unit for iron ore fines.

Mount Gibson's other customers are CITIC Australia Trading Ltd. (CAL.AU), Marubeni Corp. (8002.TO) and private European commodity trader Stemcor Holdings Ltd.

The benchmark system of pricing iron ore has come under increasing pressure in recent years and BHP Billiton Ltd. (BHP.AU) is leading a push for a move to an indexed pricing system.

Tonkin said he believes the benchmark system will survive in some form, albeit alongside other hybrid pricing mechanisms, and that he doesn't support BHP's push for an indexed system.

"I can't understand why you would want a third party to determine price - I think that is between the supplier and the buyer," he said.

"There will always be a long-term price settlement in some shape or form and there will also continue to be hybrids."

-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094; alex.wilson@dowjones.com

(Elisabeth Behrmann in Sydney contributed to this story)
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