Chinese officials recently detained four Rio Tinto employees, accused of spying and stealing state secrets. The arrests come amid contentious talks between the mining giant and China over iron-ore prices.

Earlier this month, officials from China’s Ministry of State Security took four employees of the Anglo-Australian mining giant Rio Tinto Ltd. into custody, accused of spying and stealing state secrets by allegedly bribing Chinese steel mill officials. Within days of detention, the Chinese government’s case widened to a probe of bribery and corruption in China’s steel industry.

Last week, China stepped up its campaign against the mining giant, saying the company “had bribed virtually every one of China’s big steelmakers,” the New York Times reported. In its report, China Daily, the country’s official English-language newspaper, said Rio Tinto employees bribed executives from 16 Chinese steel companies, all members of the China Iron and Steel Association, to gain access to confidential industry data.

Although Rio Tinto has rejected the allegations against its four employees as “wholly without foundation,” the dispute has rattled the iron ore industry.

According to a separate New York Times report, the allegations “may be rooted in a pricing dispute.”

The allegations come amid an effort by Beijing to strengthen the bargaining power of its steel industry against the biggest iron-ore suppliers. China, the largest steelmaker in the world and the largest buyer of iron ore, is negotiating with Rio, the world’s second-biggest exporter of the steelmaking material, on annual contract prices.

For about four decades, iron ore suppliers have held annual talks with steelmakers to fix prices for the next 12 months. The yearly event has turned into an international row after the recent allegations.

In late May, Rio announced it had agreed with Japanese and South Korean mills to cut this year’s price by 33 percent. China’s steel association rejected the annual price accord as the benchmark for its own prices and, according to Bloomberg News/Sydney Morning Herald, called for contract prices to drop as much as 45 percent.

More than two weeks after the last contracts expired on July 1, the talks have produced no deal. China has been buying iron ore on the spot market since March 31, the final day on which the 2008 contracted prices were valid, BusinessWeek reports.

“This year would be the first in at least a decade that Rio hadn’t agreed prices with most customers by June 30, when some contracts can revert to prices for immediate delivery, known as the spot market,” according to Bloomberg News/Sydney Morning Herald.

The Associated Press says that analysts are concerned the accusations and employee confinements “could complicate price talks between China and iron ore suppliers, leading to disruptions in the global industry.”

A separate AP report says:

China’s booming steel industry consumes up to 60 percent of global iron ore production and Beijing is pressing for deep price cuts after two years of increases totaling more than 120 percent.

“Analysts say an extended period without an agreement could force miners and Chinese mills to change production and investment plans, affecting companies as far away as Brazil and Australia,” according to the AP.

Meanwhile, there has been renewed discussion of substituting the annual contract price setting with a quarterly process.

Yesterday, the Wall Street Journal reported that “the world’s biggest miners and steelmakers are on the brink of forging a new system for setting iron-ore prices that is expected to increase the volatility of steel prices, but perhaps make the process more transparent.”

The Journal said:

Last year, steelmakers were locked into annual pacts when the price of iron ore fell. The spot price of iron ore is about $80 a metric ton, compared with this time last year when prices topped $120 a metric ton. The new system would set iron-ore contract prices on a quarterly basis — rather than annually as it is currently. Quarterly sales of iron ore — used almost exclusively to make steel — is likely to mean global steel prices will be more volatile.

Reuters cited a CLSA report yesterday saying that iron-ore producers would likely stand to benefit more than buyers from quarterly contracts.

Due to the commodity boom in recent years, miners have held the power to raise prices. Since the global economic slowdown last year, steelmakers, particularly in China, have been pressing for lower prices.

“We believe the breakdown in the benchmark system is being accelerated by recent developments,” according to Citigroup analysts Alan Heap and Alex Tonks (via Bloomberg News). “The Chinese iron ore market will likely operate with increased spot volumes and shorter-term contracts.”

Resources

Rio Tinto Gave Bribes to Many, China Says
by David Barboza
The New York Times, July 15, 2009

‘Bribery is Widespread’ in Rio Case
by Zhang Qi and Tong Hao
China Daily, July 15, 2009

China Broadens Steel Inquiry Beyond Rio Tinto
by David Barboza
The New York Times, July 13, 2009

Shanghai Employees – Update 1
Rio Tinto, July 17, 2009

China’s Detentions of Executives Rattle Investors
by David Barboza
The New York Times, July 12, 2009

Iron Ore Supply Contracts for 2009 Settled with Most Major Asian Customers
Rio Tinto, June 1, 2009

Iron Ore Pricing System Near Collapse as Talks Go on
Bloomberg News (via Sydney Morning Herald), June 30, 2009

China Spy Charges Against Rio Tinto’s Hu Relaxed
by Frederik Balfour
BusinessWeek, July 20, 2009

Rio Detentions Complicate China Iron Ore Talks
by Joe McDonald
The Associated Press, July 14, 2009

Reports: Rio Tinto Analysts Leave China
by Joe McDonald
The Associated Press, July 16, 2009

Industry Pushes New Iron-Ore Pricing Plan
by Robert Guy Matthews
The Wall Street Journal, July 20, 2009

Miners Lost 2 Yrs of Ore Sales to Benchmark Plan -CLSA
Reuters, July 20, 2009