Australian miners and Chinese buyers have missed an annual deadline to set benchmark iron ore prices, signaling the end of a 42-year-old system and risking new friction between the major trading partners.
Talks between Australian mining companies and China's steel industry have stalled, after reports that the Chinese demanded cuts in iron ore prices of up to 45 percent.
Australia has already agreed to cut prices by about a third for Japan and South Korea for the next year. China's insistence on deeper cuts reflects its growing influence in the resources market and the increased price volatility caused by the global financial crisis.
Industry analysts said China's iron buyers are still angry at a sharp rise in the benchmark level last year. Discussions may have been further complicated by Australian mining giant Rio Tinto's decision to reject a massive Chinese investment in its operations.
China is Australia's biggest iron ore customer. The failure to agree on a benchmark that would guarantee prices for 12 months could destabilize the market.
Producers could find it harder to plan capital expenditure and buyers would be exposed to price fluctuations.
Jonathan Barrett, the managing director of Commodity Broking Services in Australia, thinks the Chinese are trying to exert more control over the commodities sector.
"I think that they actually want see a lot of their smaller producers and users actually use that market as a means for price discovery, rather than having the concerns over having to find out the price for the entire year. Because if you do fix the price for the entire year then you really haven't got much room to negotiate in terms of the pricing," he said.
Without a benchmark deal, iron ore is sold in the open market, which could leave Chinese steelmakers vulnerable to soaring prices as the world's resources sector recovers from the downturn.
Despite missing the July first deadline, China and Australia could still lock in prices for the next 12 months.
Media reports have suggested that Beijing has softened its demands for a hefty price cut after failing to reach a deal with its major overseas suppliers.
Such an about-turn may reflect nervousness about rising prices on the spot market.
So far, there has been no official confirmation from either side as speculation mounts that some sort of deal will be signed by the end of the month.