Not likely. See belowHONG KONG (Reuters) - Spot iron ore prices...

Not likely. See below

HONG KONG (Reuters) - Spot iron ore prices have softened in China, raising hopes among steel mills that they might be able to avert a major rise in 2006 term prices sought by the world's top three miners.

Prices for imported Indian iron ore have fallen towards $65 a tonne, including costs and freight, from $70 in early April, in line with a drop in domestic iron ore prices due to expanding Chinese production.

Traders and industry officials had expected spot prices to stay strong as Chinese steel mills, headed by Baosteel Group, and the miners deadlocked over term prices for the year that began on April 1, 2006.

"More and more steel mills believe the prices this year will come down," said a senior official at a Chinese shipping company that hauls iron ore from around the world.

That belief is a seachange from March, when many in China said a price hike of about 10 percent was inevitable given the nation's expanded steel output and an uptick in domestic steel product prices.

The Chinese steel industry, backed by Beijing, had pushed for a price cut after a 71.5 percent jump in term iron ore prices last year squeezed margins.

It was not clear when the next round of negotiations were to take place between the steel mills and the miners, including Companhia Vale do Rio Doce (CVRD) of Brazil, Rio Tinto Ltd./Plc. and BHP Billiton Ltd./Plc..

INVENTORIES, CVRD

Steel mills are drawing down inventories accumulated during the first quarter in anticipation that prices would rise from April, traders said.

Meanwhile, domestic production rose nearly 33 percent in the first quarter of 2006 compared with the year before. The additional supply and softer demand could weigh on prices for domestic ore, currently at about 600 yuan a tonne, traders said.

"In the short term, supply looks huge," said a trader at an international house based in Beijing.

"In the past, every mill had inventories for a month at least. Now suddenly they want to reduce it to one week. They are releasing inventories for more than three weeks."

Xinhua news agency said on Monday iron ore stocks in China reached 60 million tonnes, including 40 million at ports.

Spot prices also have been hurt by market talk that CVRD, the world's top iron ore supplier, would offer spot cargo if China turned down its demand for a 24-percent price rise.

The delivered price for a spot cargo of CVRD ore had slipped to $68 a tonne this week, down from an initial offer in late April of $70, or the equivalent of 24 percent over term prices in the last marketing year, traders said.