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The imminent 71.5 percent iron ore import price hike is unlikely to force a significant rise in steel prices, said Qi Xiangdong, deputy secretary of the China Iron and Steel Association (CISA), on Thursday.

The demand for iron ore may shrink as high ore prices cut into the production expansion of small steel mills. This, in turn, will ease upward pressure on the price of ore, he said.

The comments came after the Shanghai Baosteel Group, on behalf of 13 Chinese steel mills, agreed to a 71.5 percent price hike for iron ore this year with Australian resource giant Rio Tinto and Brazil's Companhia de Vale do Rio Doce on February 28. Baosteel followed Japanese steel mills by agreeing to the increase.

The steel makers failed to convince mining companies that the large price increase was unhealthy for the global steel industry. Mining houses in Australia and Brazil, which control more than half the world's ore supply, jacked up the industrywide price, noting that steel prices have also been increasing.

The Baosteel agreement covers deliveries of 35.4 million tons of iron ore between April 2005 and March 2006.

China imported a record 208 million tons of iron ore last year, up a whopping 40.5 percent from 2003. Imports account for half of total domestic consumption.

Although both the production costs of steel makers and the steel price are set to rise, domestic iron ore and steel prices may not necessarily increase by 70 percent as well, Qi pointed out.

"Steel manufacturers and steel users do not have to panic," Qi said. "Traders should be cautious about rushing to import more iron ore, as market conditions may change."

Iron ore stocks remain high, with some 40 million tons, or 20 percent of last year's imports, piling up on Chinese docks. Stocks already at steel mills could last for one or two months.

More importantly, said Qi, the iron ore price hike could backfire. "If ore prices are too high for the steel mills to afford, demand will retreat."

Qi added that the freight charge might not increase along with the price of the ore itself. Freight charges make up more than half the price of imports from Brazil and 30 percent of the price of imports from Australia.

Wang Qingzu of www.custeel.com, the comprehensive official website of China's steel industry, said the price hike is expected to increase the total costs to the industry by at least 100 billion yuan (US$12.1 billion).

As domestic consumption remains strong, it is likely that the steel makers will pass most of the cost increase onto users. In the short term, the steel price is expected to rise 200 yuan (US$24.20) per ton, or 8 to 10 percent.

Large steel users, such as the automobile, home appliance, shipbuilding and construction industries, will be hit hardest by a steel price hike.

Lin Zhongbin, an automobile industry analyst with Merchants Securities, said the steel cost increase and the sluggish automobile markets will squeeze the profits of automakers.

Although the price of steel represents a small part of the total cost of a car, manufacturers can hardly pass the cost onto parts suppliers or customers.

"It is absolutely bad news for automakers," Lin said.

Shipbuilding companies will also suffer, as those that accepted orders two or three years ago will be required to absorb higher production costs.

(China Daily March 4, 2005)