Rizhao Steel was ordered to pay $114 million in arbitration with Australian iron ore miner Mount Gibson Iron for breaching a long-term iron ore purchase contract. Rizhao Steel must also pay an interest of 6 percent and the legal costs.

Shandong-based Rizhao Steel had counterclaimed for wrongful termination of the term contract and for misleading and deceptive conduct, but both were dismissed.

"$114 million is huge. With Rizhao's profit already declining in the second quarter, this will be a great hit for Rizhao, if it agrees to pay," said Wang Guoqing, an analyst with Lange Steel Information Research Center.

Defaulting on term contracts is common in the industry after the financial crisis due to the unstable spot price for iron ore. "Vale, Rio Tinto and BHP Billiton all encountered with the same problem during the financial crisis, but they were strong enough to deal with it," the 21st century Business Herald cited Zeng Jiesheng, an analyst with Mysteel.

The 15-year long-term agreement between Rizhao Steel and Mount Gibson Iron was set in July 2007. Six months after the agreement, prices for iron ore dropped sharply. The contract price far exceeded the spot price. A number of Mount Gibson's customers, including Rizhao Steel, breached their agreements and went to the spot market.

"Foreign companies also breach contracts. Chinese firms, however, usually do not have the consciousness to fight for their rights," said Wang.

"China should further develop its own iron ore production capacity to reduce the reliance on foreign companies, and also explore suppliers beyond Brazil and Australia," added Wang.

Shougang, a major Chinese steel firm, indirectly holds a stake in Mount Gibson. It does not have the final say in the operation of the Australian miner.