* China exchange starts physical trading on iron ore platform May 8
* Top miners, Chinese steelmakers have signed up to platform
* Plan can succeed if liquidity takes off
By Manolo Serapio Jr and Ruby Lian
SINGAPORE/SHANGHAI, May 7 (Reuters) - China's first physical iron ore trading platform is set to debut on Tuesday, helping the world's biggest buyer of the commodity boost its price-setting influence.
The timing looks perfect. Nearly all iron ore sold to China is now based on spot prices, with the industry evolving over the past two years after four decades of yearly-set contracts.
China has long believed that its position as the world's No. 1 iron ore consumer entitles it to a bigger say on prices, and the platform is its latest move to wrest control from top miners Vale, Rio Tinto and BHP Billiton .
But like anything new and untested, the trading community may take time to migrate to the platform, which analysts said will succeed if it attracts enough liquidity.
Top miners along with major Chinese steel producers including Baosteel, Hebei Steel and Wuhan Steel have all signed up as members of the electronic platform, which will be operated by China Beijing International Mining Exchange (CBMX).
Physical trading launches at a time when spot iron ore prices , at around $144 a tonne currently, are 25 percent off last year's peak as Chinese demand slows and supplies are plentiful.
"On the face of it, it is a recipe for success," said Rory MacDonald, broker at Freight Investor Services. "But the system must stand up and the system must be seen to perform."
CBMX said the platform will offer contracts settled in U.S. dollars and the yuan. Cargoes that can be traded include those sitting at bonded warehouses, floating at sea, or piled up at domestic ports as well as those that miners have yet to ship.
Trading hours are 9:30 am to 3:30 pm (0130-0730 GMT) with a two-hour break from 11:30 am. The benchmark trading price will be set based on the previous day's average transaction price.
The exchange will charge a commission fee for both buyers and sellers of 0.125 yuan or $0.02 per tonne.
Fines including Australia-sourced Newman, Yandi and MAC, as well as lumps are tradable, with iron content ranging from 52 percent to 67 percent. Pellet and concentrate can also be sold.
The exchange has said banks and financial firms would not be allowed to participate in a bid to stem speculation, and there will be no trading of iron ore derivatives.
Currently, trading in the spot market for seaborne cargoes is done directly between buyers and sellers. Global miners email or fax prospective buyers whenever they sell cargoes via spot tenders, a system deemed efficient and free of broking fees.
Traders say unless China offers incentives such as tax rebates or commission discounts, they are unlikely to migrate to the platform anytime soon.
"Most traders are still hesitating to participate in the platform. They need to see prices backed by strong volumes. That's the only way they can be representative of the market," said a physical dealer in Singapore.
China's steel sector imported a record 686 million tonnes of iron ore last year, up 11 percent from 2010, and at prices that, on average, were up more than 14 percent from the previous year.
The China Iron and Steel Association (CISA) has blamed "monopoly practices" by foreign miners for the surge in costs, and sees the new platform as a solution to keeping costs lower, as it is a likely challenge to the current benchmarks provided by Platts and the Platts-owned Steel Index and Metal Bulletin.
The platform will also rival the planned GlobalOre trading exchange which is backed by BHP Billiton and has offices in Singapore and London.
But some traders said market size gives China an edge.
"This platform is supported by the Chinese government. The miners have to show their support to the platform, otherwise they may feel some pressure from the Chinese government," said a physical iron ore trader in Shanghai.
With the growth in Chinese demand for iron ore this year slowing along with the overall economy, the pricing dynamic is changing to China's advantage.
"The supply and demand balance will change over the next few years and should see Chinese mills in a much stronger position whereas the last few years has very much been a sellers' market," said Christopher Ellis, a Metal Bulletin analyst.
"The new platform and interest from the mining side represents this change."