China's Baosteel said on Tuesday it would nearly double the price it pays mining group Rio Tinto for iron ore, in a deal experts said underscored the Asian giant's lynchpin role in the commodity boom.

Baosteel, China's largest steel maker acting on behalf of the nation's industry as a whole, negotiated to pay between 80 and 97 percent more than last year depending on the category of iron ore, which is used to make steel.

"China is a major iron ore importer. So China's iron ore imports will certainly impact the world's iron ore prices," said Lim Shuaik, a Beijing-based analyst with Fitch Ratings.

The new prices will affect all iron ore deliveries for the 2008 contract year that began on 1 April, Anglo-Australian giant Rio Tinto said in a statement.

Baosteel called the deal mutually beneficial and said it would help the long-term development of the steel industry on both the mining and milling sides.

"Chinese steel companies will support Rio Tinto as it expands its investment and will increase output to meet market demand," Baosteel said in a statement.

The deal was "very significant" as iron ore is one of the three main drivers of Rio Tinto's earnings, along with copper and aluminium, a Rio Tinto spokesman said.

"The increase is higher than the 71 percent and 65 percent settlements announced by Brazilian mining giant Vale earlier in the year, reflecting both the strength of the market and an indication of the proximity of Rio Tinto's iron ore to its customers," he said.

Baosteel traditionally sets the price for the nation's other steel producers for internationally purchased iron ore, whose price has soared in recent years due to growing demand amid a construction boom in fast-growing China and India.

The increases were higher than analysts had expected but still considered reasonable.

Steel demand in China is growing less quickly now than in the past, but it will be a long time before steelmakers can satisfy existing demand, Shanghai-based Mysteel Research said in a research report.

Traditionally, China has paid Brazilian and Australian suppliers the same amount, but this year the Australian miners demanded more saying their iron ore was better value because it was higher quality and cost less to transport.

As talks with Rio Tinto dragged on, Baosteel was unwilling to lose the contract for fear that it would not be able to find an alternative supplier, the research report said.

China imported 383.09-million tonnes of iron ore in 2007, up 17.4 percent from the previous year, according to government figures.

The iron ore price increase was not expected to have a massive impact on Chinese steel companies, said Helen Lau, a steel analyst at Shanghai's Daiwa Research Institute.

Australian iron ore accounts for only a quarter of what China consumes — another quarter comes from Brazil and half is domestically produced, Lau said. The most commonly used grades are typically the cheaper ones, she said.

Rising coal prices are increasing Chinese steelmakers' costs more than iron ore, Lau said.

AFP