The bank said Rio's decision marks a significant change of strategy, and the timing of the announcement was also important, coming as it does while the annual iron ore contract negotiations kick off in China.

Rio has effectively removed 15Mt anticipated supply from the contract market, GSJBW said, at a time when iron ore demand is running hot.

"Rio's intention to switch such a large volume of iron ore into the spot market could create a greater sense of urgency on the part of the major contract buyers and this could result in a faster and higher price settlement than we are currently forecasting," the bank added.

Rio's iron ore output next year is tipped to reach 190Mt, up from around 160Mt this year, so the 15Mt spot sales will represent around 8% of total sales in 2008 and 50% of the company's planned production growth, the bank said.

Global seaborne trade is currently at around 800Mt per annum, anticipated to rise another 80Mt next year, with 90% of that growth from China.

Rio has estimated it could earn another $US1.5 billion in revenue from selling the ore onto the spot market at today's benchmark and spot prices.

Benchmark iron ore, including shipping, sells at around $87 per tonne, while the current spot price for Indian ore sold into China is $187/t.

Shares in Rio were last trading at $129.20, down $1.14.