Why did Chinese steelmakers reluctantly accept 19% price hike of iron ore?

As a representative of Chinese steelmakers, Baosteel settled agreements with world top three iron ore suppliers and accepted 19 percent price hike of iron ore in 2006. Compared with Chinese mills' attitude at the end of 2005, when China refused any price increase of iron ore, accepting 19% price hike is more than what market had expected, is bitter result for Chinese mills. Main reasons for China's acceptance of the price hike are summarized as follows: First of all, that Chinese steel institutions' expectation of market was far from the fact that led Chinese mills to a passive position in negotiations, while iron ore suppliers made enough preparation for negotiations on basis of carefully analyzing and forecasting market. There is a big gap between iron ore suppliers' and steel mills' expectation for demand changes. The former insisted firmly that the sustained increase of China's steel yield need a huge amount of iron ore and price hike of that is a certain result. In 2004, China's steel output was over 280 million tons. In 2005, the output nearly increased by 70 million tons. And this figure is expected to increase by 40-50 million tons in 2006. But Chinese mills believe that China's demand for iron ore would not increase and even decline, because government not only strictly restrains new huge capacity but also are taking measures to cut low –level capacity. And with constant lowering profit level, mills are losing their drive to produce steel. In fact, before and during price negotiations, both steel output and prices kept increasing in China. So, the ore suppliers' sound of increasing ore price became louder and louder. Secondly, Chinese mills very much depend on imported iron ore and do lack control of iron ore resources abroad. Mills have to get most of their iron ore from imports because there are not enough good iron mines in China. But unlike Japanese or Indian steel giants, China mills don't partly or wholly own oversea main iron mines so far. Therefore, China mills can't gain profits from price hike on iron ore to compensate their loss in the steel cost. Thirdly, Chinese steel mills didn't hold together to form a powerful fist. The total quantity of Chinese mills is huge but the steel capacity is not centralized. The output of top 5 big mills is only 21 percent of the total. Supported by local governments, these widely spread middle and small-sized mills tend to blindly expand their capacity and join in out-of-order competition. Without long term eyesight, part mills even dealt with substantive spot import transactions of iron ore during price negotiations and created a situation that iron ore is badly needed in China. This did harm to all Chinese mills' profits and China's representatives during negotiations. Lastly, the top three iron ore suppliers also took manipulative attitude to affect negotiation process. Australian iron ore giant has negotiated with Chinese mills about 10-15 percent price hike, but this bilateral talk was interrupted by CVRD. The latter disobeyed international practices by unilaterally disclosing their will of 24.6 percent price hike. And during last period of negotiations, ore suppliers attempted to steer clear of the mills' representatives to talk directly with other mills. They wanted to settle a price and then put more pressure on mills' representatives to accept their price hike. This is the first time that China's mills have negotiated price with iron ore suppliers on behalf of Asian steel makers. Unfortunately this has resulted to no avail. But it would be rational to consider that in the next round Chinese mills' price negotiations will be stronger and more professionally performed.