China's Ministry of Commerce has turned down a proposal by the country's top steel industry body to scrap all iron ore import licenses held by trading companies, the latest twist in the pending iron ore business restructuring, people familiar with the matter said.

The ministry is reviewing iron ore import licenses but has not yet decided which trading companies' licenses should be canceled, the source said.

The ministry is still reviewing the proposal but is opposed to a flat cancellation of all import licenses possessed by trading companies, and is likely to terminate some of them, the person with knowledge of the matter said.

The move comes as the country's steel industry is finding that more of its steel mills have been involved in a widening probe of alleged business espionage linked to Anglo-Australian miner Rio Tinto.

All of the 16 Chinese steel firms that are members of the Chinese delegation in iron ore price talks have been bribed by Rio Tinto and executives from five leading domestic steel mills are reportedly under investigation, industry sources and domestic media said.

The unfolding drama surrounding the iron ore price talks following last week's detention of Rio Tinto's four employees, including an Australian citizen, has prompted industry experts and players to call for a sweeping revamp of the iron ore import business.

The China Iron and Steel Association (CISA) has proposed to scrap all of the licenses held by trading companies. Industry analysts, however, raised eyebrows about CISA's move.

"It's not reasonable to cancel all the trading firms' licenses," said the source. "It cannot solve the root problem of the huge demand for iron ore in China."

"Canceling import licenses held by trading companies won't help a lot to restore order in iron ore trading. How about other steel mills who also have import licenses?" Nie Xiuxin, a senior steel analyst from Ping An Securities, asked.

Wang Dan, a steel analyst at consultant firm Yatai Boyu said: "Some steel mills make more profit by selling ore to small ones than selling steel. Therefore, large steel companies usually don't mind bidding up prices. They can sell iron ore to small steel companies (who don't have access to the iron ore contracts) at double the rates."

The 21st Century Business Herald quoted Shan Shanghua, CISA's general secretary, as saying that the association was "currently continuing to restore order in iron ore trading".

CISA started reducing iron ore import licenses in 2005. The number of steel mills and trading companies possessing licenses in China has been reduced from 500 to 112, of which trading companies' licenses are down from 250 to 40.

MOFCOM spokesman Yao Jian said yesterday iron ore price talks between Chinese steel mills and ore miners are still ongoing.

The ministry hoped the two sides would reach a balanced conclusion at an early date.

Rio Tinto and BHP Billiton have secured agreements from Chinese steel mills for a 33 percent price cut in iron ore, Reuters reported. It said some mills had agreed to a six-month contract and some others for a year.

Australian Prime Minister Kevin Rudd yesterday said in Sydney that the world is "watching closely how this case (China's detain of Rio Tinto executives) is handled".

"I also remind our Chinese friends that China too has significant economic interests at stake in its relationship with Australia, and with its other commercial parties around the world."