Fortescue renegotiates deals as China steel mills struggle

FMG has locked in shipping freight contracts for a little over half of its customers and has contracted to pass on those costs to customers in China.

But some mills have been stranded by tumbling shipping freight prices, which have fallen from a peak of $US50 ($A72) to as low as $US9.

China's steel industry has been savaged by weak demand from residential construction companies and the financial crisis.

Last night FMG said it was "juggling" shipping schedules and renegotiating freight contracts to help some buyers.

"Clearly there are some mills in China that are tighter than others, and smaller ones are more tightly constrained than others," said executive director Russell Scrimshaw.

"We'll continue to work with our customers on the shipping price, which is entirely different to the contract price.

"Let me just state categorically that not one customer is getting a discount from the benchmark price for the iron ore."

FMG is believed to have locked many freight contracts at about $US24.50 a tonne and contracted to pass those costs on to steel mills.

Local industry sources say Aosen Steel says it cannot pay more than $US11 and Delong Steel, also in Hebei province, is asking for $US9.

The mills want FMG to wear the difference.

Mr Scrimshaw said FMG provided freight as "a service" to a little over half its cust-omers and aimed only to break even with its freight book.

He denied that Delong had threatened to refuse one of its deliveries. The privately owned Hebei steel maker has bought three of about 60 shiploads that FMG has delivered since May, with another shipload due in the middle of next month.

Rio Tinto and BHP Billiton claim they are relatively insulated from a market downturn because they have long relationships with the most profitable mills.

But Mr Scrimshaw said FMG had more flexibility than Rio Tinto or BHP Billiton to "juggle" deliveries because it had contracts with 38 mills, including all of the top 10 producers.

While some mills were struggling, he said other existing and new customers were asking for more deliveries.

"We'll work with Delong, or whoever it is, for this next shipment and we'll see where the market's at for shipping," he said.

Industry sources said Delong Steel had slashed production and had shed about a quarter of its workforce this month and was considering more lay-offs if conditions did not improve soon.

Rio and BHP will soon have to face torrid contract price negotiations.

The spot market price for Indian 63% iron ore in Tangshan yesterday hit $US65, well below Australian contract prices and down $US80 in less than three months.