Iron Ore producer , Fortescue Metals Group Ltd,  has suspended about two thirds of its long-term shipping contracts as its Chinese customers take advantage of cheaper rates stemming from the commodities slump.

Fortescue said on Friday that it was suspending all long-term cost and freight (CFR) shipping contracts, whereby the miner covers transport costs and passes them on to its steel mill customers at a premium.

The company said the change would not affect total volumes of iron ore shipped, but would change the mix of sales between the suspended contracts and the other major form of shipment, FOB (freight on board).

Chinese steel mills are attempting to take advantage of low ship charter rates caused by dampened export activity amid the global economic downturn.

The mills may also want to manage their own shipping because it gives them greater scheduling control, allowing them to determine when product arrives.

“The changed arrangements are in direct response to market conditions demanding greater FOB sales,” Fortescue said in a statement.

It is unknown how the ship owners have reacted to the suspension of the long-term contracts.

Fortescue offered the explanation that the move was “on the basis of unforeseen circumstances”.

The miner said it would not affect the volume of iron ore that it shipped.

The impact of the changed arrangements on Fortescue’s bottom line is unclear.

Many exporters prefer FOB - which is playfully referred to as “free of bother” - to CFR contracts because the product is off their hands as soon as it is delivered to port.

In Fortescue’s case, providing shipping for its customers is an important revenue stream, bringing in $71.15 million in 2007/08 against shipping costs of $60.85 million.

The company’s balance sheet for this financial year is almost certainly already being hampered by a slump in spot prices for iron ore as demand from Chinese steel mills wanes.

The iron ore miner said about two-thirds of its sales had been on CFR terms but this was likely to reduce to about one-third of sales.

It would instead increase FOB sales, which involve the customer directly paying a ship charter company for transporting product.

Separately, Australia’s newest iron ore miner Atlas Iron Ltd on Friday shipped its first load of the bulk commodity to an unidentified medium-sized Chinese steel mill using Fortescue’s port facilities at Port Hedland in Western Australia.

Atlas is the first company to have reached an agreement with Fortescue to use its infrastructure, and is cashed up with no debt.

“This shipment shows third-party access can work,” Fortescue executive director Graeme Rowley said.