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Melbourne. China, planning to bankroll a $6 billion iron ore expansion of Fortescue Metals Group in Australia, is poised to make further investments to help break the “stranglehold” of the world’s three-largest exporters.

“The Chinese steel mills are trying to dilute the concentration of iron ore supply,” said Mark Pervan, senior commodity strategist at Australia & New Zealand Banking Group. “They will be looking for more deals like this.”

China, the world’s biggest buyer of the ore, has invested in $56 billion of projects globally to try to reduce dependence on Vale SA, Rio Tinto Group and BHP Billiton, which control two-thirds of ocean freighted supply. China on Monday scaled back contract price demands together with the Fortescue deal after seven months of stalled talks.

The Chinese “are very keen to see supply away from BHP, Rio and Vale grow,” said Tim Schroeders, who helps manage 1.1 billion Australian dollars ($904 million) in stocks at Pengana Capital in Melbourne, including the three biggest producers. They would want to “lessen the stranglehold, or perceived stranglehold, that the big three have,” he said.

Chinese lenders will arrange between $5.5 billion and $6 billion of financing for Fortescue, in which China’s Hunan Valin Iron & Steel Group has a stake, as part of a sales price accord, the Perth-based company said on Monday. Most of the money will be used to expand production, said Fortescue’s chief executive officer, Andrew Forrest.

“Fortescue and China are hoping the miner has the potential to break the duopoly of BHP and Rio” for Australian iron ore, said Zhou Xizeng, a Beijing-based analyst with Citic Securities. BHP and Rio are the two biggest producers in Australia, itself the biggest exporter of the ore.

Fortescue, which had delayed expanding its iron mine amid a cash squeeze and a slump in demand, plans to increase capacity to 95 million metric tons by 2012, the company’s chief financial officer, Michael Minosora, said last week, from current capacity of about 45 million tons. It had cash of $654 million and debt of $2.8 billion at June 30, according to company filings.

“The Chinese aren’t there for next year, they’re not there for the year after, they’re there for the next 10 to 20 years,” said James Wilson, a resources analyst at DJ Carmichael in Perth. “Fortescue has its own infrastructure, its own port facilities, it’s ramping up production. There’s a great case for investment there.”

China bought record volumes of ore in July as the government’s 4 trillion yuan ($585 billion) stimulus package spurs demand for steel in construction, automobiles and washing machines. China may spend more than $500 billion on foreign resource investments over the next eight years, according to Deloitte Touche Tohmatsu.

China’s drive to secure ore production was set back in June when Rio, the world’s second-largest exporter, rejected a planned $19.5 billion investment by Aluminum Corporation of China (Chinalco), which would have included stakes in Rio’s Australian iron ore operations. The deal was scrapped in favor of an iron ore venture with rival BHP, a venture which “hints heavily of monopoly,” the China Iron and Steel Association has said.

“The BHP-Rio joint venture is China Inc.’s worst nightmare,” said Charlie Aitken, Southern Cross Equities executive director. “China Inc. has attempted to make Rio appear a ‘dishonorable company’ ever since Rio left Chinalco at the altar and ran into BHP’s arms.”

Hunan Valin Iron & Steel, Fortescue’s second-largest shareholder with a 17.3 percent stake, said in May that it would help Fortescue produce 100 million tons of iron ore a year. It started output from its 2.8 billion Australian dollar mine in May last year. Chinese financing of as much as $6 billion could fund an expansion to 155 million tons a year and potentially pay some debt, Southern Cross said in a report on Monday.

“Fortescue’s cash flow would be squeezed unless it paid down existing debt or it quickly and significantly increased sales volumes,” Morgan Stanley said.

Rio’s share of ore output in the 12 months to June 30, 2009, was 151 million tons, while BHP reported output of 114.4 million tons in the 12 months ended June 30. BHP has approved spending of $4.8 billion to increase capacity to 205 million tons a year from 2011 and is studying a further lift to 350 million tons a year. Rio is studying an expansion to 320 million tons.

“China’s strategic aim to encourage as much iron ore production as possible has the ability to undermine the historical high returns that iron ore has generated,” Citigroup’s Clarke Wilkins said.

Bloomberg