Fortescue Metals Group, Australia's third-largest iron or miner, says it is in talks over whether to continue to sell ore to mainland steel mills at discounted prices. Fortescue agreed in August to sell ore to China at 3 per cent below the price agreed between mining companies and Japanese steel mills, in return for up to US$6 billion in funding from Chinese institutions. However, the deal fell apart after Fortescue was unable to agree terms on the funding, leaving the discounted pricing in doubt. 'We are still in discussions over how to price the rest in the final quarter,' executive director Graeme Rowley told Reuters yesterday. Fortescue sold about 10 million tonnes of ore to the mainland last month at discounted prices but is not obliged to continue. The deal was done following the collapse of the annual iron ore negotiations between the China Iron and Steel Association, which was leading the talks on behalf of mainland steel mills, and Rio Tinto on behalf of the miners. China had demanded a greater say in setting iron ore prices and had been asking for a 40 per cent reduction in last year's prices. Rio refused to offer more than the 33 per cent reduction agreed with Japan, South Korea and Taiwan. As a result, there was no agreement and the lack of a benchmark price has resulted in a chaotic market for iron ore in China this year. About 60 per cent of iron sales were done at spot market prices, which at one point were 80 per cent higher than the contract price offered to Chinese negotiators. The collapse of the mainland funding deal forced Fortescue to change its expansion programme for its Pilbara mining resources. Instead, it will try to finance a more than doubling of its West Australian iron ore capacity largely from existing cash and future cash flow. To do so, Andrew Forrest, one of Australia's richest men, has abandoned a US$220 million plant upgrade at his existing Cloudbreak operations in the Pilbara region for a US$360 million first-stage rail, mine and plant at the nearby Christmas Creek deposit. This aims to take production from about 39 million tonnes now to 55 million tonnes in mid-2011 and 95 million tonnes by 2012. Fortescue sells all its ore to the mainland but has held talks with both Japanese and Korean steel mills and hopes to sell five million tonnes to both markets next year. It might also consider blending its lumpy ore with the fine ores produced by Brazilian miners such as Vale to achieve a more marketable blend, which would offer steelmakers a more cost-effective product, Rowley said. 'There may be some options down the road about blending our ore with theirs.' Iron ore imports by China jumped 30 per cent to a record last month as traders and mills replenished depleted inventories. Imports reached 64.6 million tonnes, according to the customs office.