(http://www.1cbn.com update as translated by our China correspondent, Andrew van Buren).

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Seaborne trade in iron ore is the primary factor for demand in the dry bulk carriers that Yangzijiang builds, according to the shipbuilder's chairman Ren Yuanlin. File photo by Sim Kih

THE CHINA Iron & Steel Association (CISA), the industry group which represents the sector, said it was misrepresented in recent reports that said it hoped to angle for cheaper iron ore imports from Fortescue Metals Group (ASX: FMG) in return for massive financing assistance from Chinese lenders.

Ever since the deal signed between us and FMG, outsiders have continuously misunderstood the letter and spirit of the agreement regarding 2009 iron ore import contract pricing, said CISA General Secretary Mr. Dan Shanghua.

FMG, Australia’s third biggest miner of the chief raw material used in steelmaking, intends to boost iron ore capacity to 95 mln metric tons by 2012, more than double current capacity of approximately 45 mln metric tons.

Analysts believe this could cost as much as 3.6 bln usd to achieve.

FMG has indicated the condition subsequent relating to the completion of finance from major Chinese producer Baosteel Group and CISA by Sept 30 was not met.

The company was looking to raise as much as 6.0 bln usd in funding.

"Fortescue intends to continue cooperatively with CISA," the Australian firm said in a statement.

CISA: We can’t speak for the Finance Ministry

Foreign media outlets recently broke with a news report that FMG and Baosteel signed a deal that would allow them to adjust prices outside the parameters of the annual pricing contract due to the Australian mining firm’s inability to meet loan financing obligations for around 5.5-6.0 bln usd by the end of September with its Chinese banking partner.

The terms of the financing arrangement were reportedly agreed to prior to the Sept 30 deadline.

Mr. Dan said that the pricing contract agreements for iron ore with FMG were unrelated to the 6.0 bln usd financing agreements, which is being overseen by the Finance Ministry.

CISA said during a press conference in late August that it had at the time sat down with FMG and reached serious understandings on price reductions for iron ore fines and lumps by 35.02% and 50.42%, respectively, with the agreements in effect from July 1 of this year to end-2009.

The same day, FMG released the same information in an announcement to the Australian Stock Exchange.

FMG said that as a precondition to the deal, FMG and an unnamed Chinese financial institution had to complete a 5.5-6.0 bln usd financing deal by Sept 30.

This financing agreement was misunderstood by outside media as a backdoor deal by CISA and Baosteel for extra-contractual cheaper iron ore from the Australian miner, the Chinese side said.

This understandably worried foreign steelmakers as such a deal from a major iron ore producer based on financing obligations or assistance would give Baosteel an unfair raw material cost advantage over its competitors and might also drive down previously agreed to iron ore contract prices worldwide.

Mr. Dan yesterday added that the pricing agreement between China and FMG did not stipulate a link with the financing arrangements with the Chinese financial institution.

He said the Chinese lender was still interested in helping FMG expand its overall scale and production capacity.

“FMG certainly did bring up the fact with a Chinese lender that it is interested in 6.0 bln usd in financing, and it needed several bln usd to expand capacity.

But that is the business of the Finance Ministry and none of our own. We can’t speak for the Finance Ministry.”

According to Mr. Dan, even though FMG failed to get its desired financing from the Chinese partner, FMG’s existing agreements with Baosteel are still in effect and valid.

“Since July 1 of this year, FMG iron ore imports of these two product categories in China have been selling at the agreed-to prices,” he said.

When contacted yesterday, FMG said they had no further information on the matter with CISA but said more details would emerge from a statement it released to the Australian bourse.

FMG has been actively enhancing ties with China, its biggest customer.

In February of this year, FMG agreed to sell a 16.5% stake to Chinese specialty steelmaker Hunan Valin.

China is both the worlds largest steelmaker and the biggest importer of iron ore.

Over the past several years, China has typically sourced around half of its iron ore from abroad largely due to higher iron (Fe) concentrations of imported material.

This has led groups like CISA to help move away from perceived over-reliance on imports from the worlds top three iron ore exporters: Australias Rio Tinto and BHP as well as Vale from Brazil.

The highly sensitive political component and the importance both steelmakers and miners put on the annual iron ore pricing contract negotiations was made all the more evident with the arrest earlier this year of several staff at Rio Tintos Shanghai office for alleged transfer of state secrets.

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