CHINA'S tough-talking steel association has buckled to criticism from its members and the reality of China's economic recovery, signalling that it is ready to accept a smaller cut in the benchmark iron ore price than it had previously said was possible.

Respected media outlets, including Caijing magazine and Shanghai Security News, reported that the China Iron & Steel Association has decided to accept a settlement smaller than the 40 per cent it previously demanded.

But the association was not yet willing to go as low as the 33 per cent benchmark contract already agreed with steel mills in Japan, Korea and Taiwan, the reports said.

"It is a decision that has been made," said a source familiar with the association's discussions. "They just need some excuse to do it - they have been so strong for such a long time - they need a higher spot price to accept."

The iron ore spot market price has been rising as mills and traders grow more confident that China's economic recovery is on track.

Yesterday the purchasing managers' index - which financial markets currently regard as the most important Chinese economic indicator - pushed further into expansion territory.

The CLSA purchasing managers' index rose to 51.8 in June from 51.2 in May, pushing it above the survey's historical average of 51.7.

The official purchasing managers index, compiled separately by China's National Bureau of Statistics, rose to 53.2 in June, signalling a fourth consecutive month of economic expansion.

Both surveys showed export orders were expanding for the first time this year.

Separate figures showed electricity output in mid-June had bounced and passenger vehicle sales rose 21.2 per cent in the first five months of 2009 from the same period a year earlier.

Iron ore negotiators, however, are conscious that steel and iron ore demand tends to soften in the Chinese summer heat, as construction work slows.

Xu Zhongbo, the chief executive of Beijing Metal Consulting, said the China Iron & Steel Association would not accept a 33 per cent price cut but predicted there would be a compromise in September.

"The two sides need time to cool down to see which direction the world economy is heading," he said, adding that steel mills would be "punished" if they broke ranks with the association to set their own contracts. Nevertheless, media reports yesterday indicated the association's price-setting authority is fraying as mills pay more for iron ore on the spot market than they would if their industry association had accepted Rio Tinto's long-standing offer.

Many of the hundreds of smaller and privately-owned mills that are not members of the China Steel & Iron Association will be happy to see the end of the benchmark system, which they say allows big and state-owned mills to profiteer by buying benchmark ore cheaply and on-selling to them at steep mark-ups.