BEIJING, May 10 -- Chinese steel mills are now importing iron ore through monthly and quarterly contracts after the collapse of annual pricing negotiations, the founder and chief executive of China's biggest private mill said on Sunday.

Without the annual prices, which capped term prices below spot prices for most of the last six years, steel executives are determined to fight a proposed iron ore joint venture between mining giants Rio Tinto and BHP Billiton which they fear will further raise raw material prices for the industry.

Spot prices are now so high in comparison to domestic steel prices that mills buying on the spot market face a loss, said Shen Wenrong, head of Shagang Steel.

"We aren't buying iron ore higher than $170. We'd rather not produce," Shen said at a steel conference in Beijing. Spot prices are currently flirting with $200 a tonne.

"We haven't yet reach the stage where we are cutting production. We are using our inventories instead."

The traditional system where the world's top three miners sell iron ore to their biggest customers, including Shagang, at fixed annual prices has essentially fallen apart as Chinese demand caused spot prices to soar while China's state-backed steel association refused to settle at the same annual price as Japanese or Korean mills.

Last month, sources said big Chinese mills had taken to buying on a quarterly basis at the same price as other Asian mills, defying association orders not to sign any agreements unless an annual deal is reached.

ANTI-MONOPOLY

Regulatory authorities, including in China, are currently reviewing the two miners' proposed operations joint venture in the Pilbara, an ore-rich area of Western Australia.

The Chinese steel industry is lobbying the Ministry of Commerce to reject the deal in a test case for the power and enforceability of China's relatively new anti-monopoly law.

The Chinese steel industry needs to take responsibility for controlling prices by increasing use of scrap and low-grade domestic iron ore and by buying stakes in overseas mines, said Xu Kuangdi, head of the China Academy of Engineering.

"In iron ore we have no advantage because we are completely dependent on others. We need to buy more overseas stakes," said Xu, a former mayor of Shanghai who has influence in setting industrial policy.

The proposed merger between BHP Billiton and Rio Tinto would compound "monopoly pricing power" in the mining industry and worsen China's negotiating position, said Deng Qilin, general manager of Wuhan Iron and Steel, China's third-biggest mill.

"China needs iron ore but you cannot completely set prices by yourself. It isn't fair, and it isn't setting prices through negotiation," Deng told the conference.

Asked what could be done about it, he said China and the World Steel Association could only urge the miners to consider "fairness" through "a long-term, reasonable market mechanism".

Paolo Rocca, chairman of the World Steel Association, said while they were lobbying anti-trust authorities at a regional level, little could be done to stop a "supranational cartel".

He drew an analogy with OPEC, through which some oil producing nations coordinate output and attempt to influence prices.

Rocca said the long-term solution was to boost global supplies and make sure new discoveries were not owned by the three big miners.