* Miners had planned to join forces to win China sales
* Higher iron ore price helps remove need for deal
* Lower shipping, bunker rates also a factor (Adds Fortescue ceo comments)
By James Regan
SYDNEY, Dec 19 (Reuters) - Australian iron ore miner Fortescue Metals Group FMG.AX said on Monday its proposed tie-up with larger Brazilian rival Vale VALE5.SA to customise orders for Chinese steelmakers will not proceed.
Vale, the world's No. 1 iron ore miner, and Fortescue, the world's No. 4, said in March they were in talks to blend up to 100 million tonnes of their ore in China, in a deal that could also have led to Vale taking a stake in Fortescue.
The aim was to win a bigger share of the Chinese market by matching the quality of the ore produced by Australia's Rio Tinto RIO.AX RIO.L , which is seen as the local benchmark. had very constructive discussions with Vale, but just were not able to reach commercial terms," Fortescue Chief Executive Nev Power told Reuters.
"While we are disappointed we weren't able to do a deal, our ore is already very well accepted in the market, so we can also blend with other companies."
The venture would have also given Vale an option to buy between 5 and 15 percent of Fortescue's shares on market and take stakes in Fortescue's existing or future mines.
Rising iron ore prices, coupled with cheap shipping and fuel costs, pushed the need for a deal to the sidelines, according to Power.
Iron ore has enjoyed a remarkable 2016, bouncing around 85 percent from where it started the year and more than doubling from February's low point of around $38 a tonne.
"Shipping and bunkering rates are at all-time lows, meaning for now South American producers such as Vale have become more competitive against Australia for exporting to China," Power said.
The unraveling of the deal comes as Fortescue on Monday took delivery of the first of eight custom-built iron ore carriers aimed at giving it greater control over the timing of shipments to China.
The ships will eventually carry about 12 percent of the 165 million tonnes of iron ore that Fortescue ships annually.
Three more freighters are under construction at China's Yangzijiang Shipyard and a further four are being built at the Guangzhou Shipyard International.