Various factors to boost China's iron ore imports

The new round of negotiations for the 2007 international iron ore prices is expected to begin at the end of Oct. 2006. It's widely forecasted that China will play a more important role in the decision of prices than ever before. Although China is still the biggest importer of iron ore in the world, the increase trend in its iron ore imports dropped significantly in 2006. The major reasons are two: steel output increase has slowed down while domestic supply of iron ore has increased rapidly. However, there are factors which will restrain the supply of domestic iron ore, and probably force Chinese steelmakers to import more iron ore from overseas suppliers: Cost increases in domestic natural resources According to indications from officials at China's Finance Ministry, China is to deepen reforms in the management of its environment and natural resources. The result will be an increase in the cost of mining natural resources. Due to historical reasons, state-owned mining enterprises didn't have to pay all the costs for the mining of resources. Currently, excessive mining of natural resources and serious pollution causes huge harm to the nation and the economy's development. In the near future, mining companies will have to pay more for their use of resources and for the processing of pollution. These related policies will inevitably cause price hikes in natural resources, including iron ore. Limited supply increase of domestic iron ore Domestic iron ore supply in China has increased sharply in recent years. During Jan. and Aug. in 2006, the supply growth rate of domestic iron ore reached 36 percent year on year. Meanwhile, the big steelmakers have taken positive measures to develop and control new iron ore resources within China. Some of them, such as Shougang Steel and Wuhan Steel, are near to achieving their goals. However, two causes will limit increases in the supply of iron ore. Firstly, the Chinese government is taking strict measures to cool overheated investment including investment in mines. One of the major measures is to investigate existing illegal projects. Because a certain number of iron ore mining projects who are operating without state permission probably will be investigated and closed, supply is likely to be influenced. Secondly, the major iron mines in China produce ore of low iron content. The average iron content of iron ore is around 44 percent worldwide, while China's average level is just 33 percent. Therefore, the actual supply increase of iron ore fine which is the real raw material of steel is limited, though more iron mines are being developed. Overseas suppliers improve ties with domestic users In addition, the top overseas suppliers of iron ore are actively establishing wide networks with domestic steelmakers in order to promote the sale of their products. As an example, it's reported that CVRD has signed long term sales contracts involving an annual figure of 4-9 million tons of iron ore with several local Chinese steelmakers such as Maanshan Steel and Beitai Steel. Meanwhile, this iron ore giant is also trying to establish a strategical alliance relationship with Shougang Steel. Generally speaking, China is likely to import more iron ore in the near future. However, this trend will not lead to a price hike in iron ore. This is because overseas supply of iron ore is going into oversupply and because competition between suppliers is getting fiercer.