Sinosteel Corp, China's second-largest iron ore trader, is seeking a majority stake in Grange Resources Ltd's US$1.1 billion iron ore pellet project in Western Australia to secure supplies of the steelmaking ingredient.

Sinosteel is in talks to take a stake of as much as 70 per cent in the project, which could produce 6.6 million tons of iron concentrate, said Xiaofei Cui, managing director of Sinosteel's Australian unit.

Co-operating with smaller producers such as Grange may enable companies in China, the world's fastest-growing economy, to reduce their reliance on BHP Billiton, Rio Tinto Group and Cia Vale do Rio Doce. The top three iron ore producers, who account for about three-quarters of the global trade, last year won a 71.5 per cent increase in prices.

"The Chinese want to diversify their supplies and with the small miners they can get equity stakes that they can't get from the bigger ones like Rio Tinto," Peter Chilton, who helps manage A$1.1 billion (US$812 million) at Constellation Capital Management, said. "If they can get in early, they may be able to lock in supplies at good prices."

China's economy has grown 55 per cent in the last five years, helping it to surpass the UK as the world's fourth-largest economy. That's fuelled a 25 per cent jump in steel output last year, as more cars, plants and appliances were built. Production may rise another 10 per cent this year, the China Iron and Steel Association said.

Surging demand from Chinese steelmakers and limited supplies led to iron ore prices jumping to a record last year. Prices may rise at least 10 per cent again this April, Kumba Resources Ltd, the world's No 4 iron ore producer, said last week. Sinosteel's Cui last week had argued prices should fall by up to 10 per cent as steelmakers are facing lower steel prices.

Grange's shares have fallen 19 per cent this year-to-date, compared with the 3 per cent gain on the benchmark S&P/ASX 200 Index.

Grange's project involves building a mine at the Southdown magnetite deposit in Western Australia. Production would be shipped from the Port of Albany. The mine, which could last 22 years, may produce 6.6 million tons of concentrate a year, said Grange's Chief Financial Officer Mark Smith.

The concentrate would be exported to a proposed pellet plant in Malaysia for processing. Construction for the plant could take 24 months to 30 months, said Smith on Monday.

"We do need a partner for the funding, and Sinosteel would be a good fit for Grange, but there's also other parties interested," Smith said. As many as 10 companies have expressed interest in the project, said Smith.

Grange is scheduled to complete a feasibility study on the project by the end of March, he said.

"Among the projects we're studying in Australia, this is one we're quite hopeful about," Sinosteel's Cui said. "It does depend on Grange because there's quite a few other companies competing for this."

China, the world's largest steelmaker, may increase iron ore imports by 16 per cent this year to 320 million tons, China Metallurgical and Mining Association Chairman Zou Jian said last month. Its economy could grow 9.2 per cent this year, after expanding 9.9 per cent in 2005, according to the World Bank.