Anshan Iron and Steel Group has sealed a US$65 billion iron ore contract with an independent Australian ore producer.

China's second-largest steel maker has agreed with Perth-based Gindalbie Metals Ltd to buy all the output from the Karara project in Western Australia. The iron ore project has an expected mine life of more than 30 years and it could produce more than 30 million metric tons annually, Gindalbie said yesterday.

Based on the 2009 benchmark iron ore price and stage one production rate, the agreement is worth approximately US$580 million a year and will increase to more than US$2.1 billion a year at the peak production rate.

Construction of the mine started late last year and the first shipments to China are scheduled in the second half of 2011.

"For Anshan Steel, Karara becomes a strategic, long-term, cost effective source of iron ore for their expanding steel making facilities," said Garret Dixon, managing director of Gindalbie.

"Anshan Steel will pay full market price for the iron ore," added Dixon.

"At the same time it is apparent that iron ore demand is strong and it looks like there will be a healthy increase in iron ore prices this year. In addition, we would not be surprised to see a further increase next year when Karara begins production," Dixon said.

Anshan Steel is Gindalbie's largest shareholder with a 36.2 percent stake.

Anshan Steel has made a joint investment of A$1.8 billion (US$1.66 billion) with Gindalbie to develop the Karara iron ore project, which is equally owned by the two parties.