Annual iron ore price talks between China and top international miners, which were scheduled to end on April 1, have yet to yield results, as Brazil's Vale and BHP Billiton of Australia want to increase 2010 ore prices by 90 percent from the previous year. The two ore giants are also looking to downsize the contract from a yearlong commitment to a quarterly one.

But China's steel companies, represented by Shanghai Baosteel Group Corp., in their talks with the big three iron ore suppliers—Vale, BHP and Rio Tinto—said they would resist any price increases and have even considered a boycott of the foreign suppliers if the issue is not resolved soon.

Officials with the Ministry of Commerce, the Ministry of Industry and Information (MII), as well as the China Iron & Steel Association (CISA) hope to maintain the current annual pricing system and keep the price at a reasonable level. They also want to ensure the steady and sustainable development of the international iron ore trade and steel and iron industries.

But according to CISA, the negotiation this year is no longer a "negotiation," but rather an "ultimatum"—the three largest miners threatened to withhold shipments unless a seasonal contract is accepted.

China imported 69.9 percent of its iron ore needs last year. Around 70 percent of those imports came from the three biggest suppliers.

Resisting the hikes

Two Japanese steelmakers accepted a 90-percent increase in iron ore prices from Brazil's Vale for the April-June period on March 30, and Korean steel mills are about to accept this price hike as well, said Vale.

BHP Billiton also announced on its website that it has reached an agreement with other Asian clients on short-term contracts.

While the big three gain ground by setting contract prices at record highs and are determined to end the decades-old annual benchmark pricing system, China's licensed iron ore importers are unwilling to accept the change.

CISA and the China Chamber of Commerce of Metal, Mineral and Chemical Importers & Exporters (CCCMC) summoned licensed importers, including steelmakers and traders, to an emergency meeting in Beijing on April 2, to address the negotiation deadlock. The two organizations urged them to observe a two-month boycott of iron ore produced by the three miners in order to send a message of "no" to a quarterly-based pricing system and a 90-percent price hike.

CISA reports said steel mills have reserves that would last two months, in addition to 75 million tons awaiting use in harbors nationwide. Production at domestic mines increased 18 percent during the January-February period, adding to China's available iron ore. CISA holds that China is capable of a two-month boycott on the big three miners.

The two organizations also cut the number of iron ore importers—those who imported less than 1 million tons of iron ore last year will not have their importer license renewed this year.

But such efforts may be futile, since price hikes are all but guaranteed due to strong demand, though China continues to push on with negotiations with the three ore miners, Chairman of Baosteel Group He Wenbo said on March 31.

"Large-scale price hikes will cause Chinese steelmakers to start incurring huge losses," said Jia Yinsong, an inspector with the raw material department of MII.

Even Baosteel, one of China's five major steelmakers which has handled cost control in the past, is feeling the pressure of a possible 90-percent increase, which could add $80 for every ton of iron produced. The increase will be even more detrimental to small and medium-sized steel mills with smaller financial resource pools.

Affected by the financial crisis, China's iron and steel industry ran at a loss from October 2008 to April 2009, and only began reaping profits again in May last year. The profit rate of Chinese steelmakers last year was only 2.46 percent, far less than the average 5.47 percent of the country's industrial sector, while BHP Billiton raked in $6.1 billion in net profits in the second half of 2009, up 134.4 percent.

China's steelmakers began to transfer that pressure by increasing the prices of their products. According to statistics from Xiben New Line Co. Ltd., a steel product trading platform, more than 20 steel mills announced price hikes for their products on March 25.

The real estate industry bears the brunt of steel price increases—steel accounts for 15 percent of the cost of all construction materials.

Price increases for household appliances such as refrigerators, washing machines and air conditioners are inevitable too, as manufacturers already make razor-thin profits.

Price increases of manufactured goods will only aggravate inflationary pressures in China.

Want it self-sufficient

CISA said China would increase its domestic supply of iron ore if Chinese steelmakers continue to lose ground at the iron ore benchmark negotiation.

CISA statistics said iron ore production increased 17.8 percent year on year in the January-February period this year, almost doubling the growth rate from the previous year. Annual production will increase to 1 billion tons, from last year's 880 million tons.

In addition, iron ore projects under construction or planning have an annual production capacity of 480 million tons, and mining at these projects will start in two or three years.

And China has enough reserves to sustain itself, should it need to. The country has made breakthroughs in mineral exploration in recent years, reporting verified iron ore reserves of nearly 12 billion tons. A report on the mineral exploration work in 2009, compiled by the China Geological Survey under the Ministry of Land and Resources and released on April 2, predicted China could have more than 200 billion tons of iron ore reserves.

CISA said the high cost of iron ore mining in China accounts for the insufficient domestic supply, because China has many small and medium-sized mines but few large ones. In addition, a considerable amount of these reserves consist of associated ore, which makes mining and processing more difficult. Yet, MII and major steelmakers have invested heavily in iron ore mining and processing technologies in recent years, and these efforts are expected to greatly increase China's iron ore production in the future.