China's bid to rein in soaring iron ore prices suffered a serious setback last week, after Japanese and European steel makers agreed to a 19 percent increase with mining heavyweights in Australia and Brazil.
 
After months of negotiations, China, the world's biggest steel maker and iron ore importer, has been holding out for an increase of about 10 percent. It is now isolated in price talks and under strong pressure to fall into line.
 
Traditionally, Japanese or European steel makers strike a new price with ore suppliers in annual negotiations, which becomes the benchmark price for buyers everywhere.
 
China vowed to take the lead in the price negotiations after factories found themselves saddled with a 71.5 percent increase in ore prices negotiated between Nippon Steel of Japan and CVRD of Brazil, one of the world's largest ore miners.
 
Eager to exert more influence over the global steel industry, senior Chinese government officials and diplomats began lobbying governments and industry groups in producer countries in an effort to head off further steep increases.
 
China's official negotiator for the industry, Baosteel Group, took a hard line, consistently rejecting demands for price increases of 20 percent or more.
 
So far, however, the effort has failed.
 
The world's three dominant iron ore miners - CVRD of Brazil, Rio Tinto Group of Australia and the Anglo-Australian company BHP Billiton - control 70 percent of global supply.
 
They are riding a wave of record profit from an ongoing global commodity boom fueled largely by Chinese demand for raw materials.
 
One by one last week, European and Japanese steel makers began accepting the 19 percent increase for 2006 demanded by the suppliers.
 
ThyssenKrupp of Germany was the first to acquiesce, agreeing to a 19 percent rise with CVRD on May 15.
 
Rio Tinto announced a few days later that one of its subsidiaries had inked an accord for a 19 percent increase with Japanese steel mills.
 
A day later, Mittal Steel, the world's biggest steel-making company, agreed to the new rate with CVRD.
 
China's buyers nonetheless have refused to accept the increase. In a statement posted on its Web site, the China Iron and Steel Association said Friday that negotiations would continue.
 
"Asian benchmark iron ore prices haven't been set," the association said.
 
In reports in the official Chinese media, senior steel industry officials urged suppliers to consider the prevailing market conditions in China in negotiating new prices.
 
But with prices on the international spot market for iron ore about 30 percent higher than the existing contract price, most analysts believe China's steel mills will be forced to back down.
 
"There is a spot market out there," said David Thurtell, a Sydney-based commodity analyst with Commonwealth Bank. "If the miners can't sell the tonnage, they can just put it on the spot market."
 
As the biggest buyer, China should have considerable leverage in negotiations, but industry experts warn that rapid expansion and high debt levels have undermined the industry's bargaining power.
 
Brisk growth in China's vast but frag mented steel industry has left the country with a voracious appetite for iron ore. China imported 108 million metric tons in the first four months this year, 23.5 percent more than the same period last year. Analysts estimate that Chinese steel makers will consume 40 percent of global output this year.
 
Steel is vital to China's expanding economy, but many local mills operate on extremely tight margins compared to their foreign counterparts.
 
 BEIJING: China's bid to rein in soaring iron ore prices suffered a serious setback last week, after Japanese and European steel makers agreed to a 19 percent increase with mining heavyweights in Australia and Brazil.
 
After months of negotiations, China, the world's biggest steel maker and iron ore importer, has been holding out for an increase of about 10 percent. It is now isolated in price talks and under strong pressure to fall into line.
 
Traditionally, Japanese or European steel makers strike a new price with ore suppliers in annual negotiations, which becomes the benchmark price for buyers everywhere.
 
China vowed to take the lead in the price negotiations after factories found themselves saddled with a 71.5 percent increase in ore prices negotiated between Nippon Steel of Japan and CVRD of Brazil, one of the world's largest ore miners.
 
Eager to exert more influence over the global steel industry, senior Chinese government officials and diplomats began lobbying governments and industry groups in producer countries in an effort to head off further steep increases.
 
China's official negotiator for the industry, Baosteel Group, took a hard line, consistently rejecting demands for price increases of 20 percent or more.
 
So far, however, the effort has failed.
 
The world's three dominant iron ore miners - CVRD of Brazil, Rio Tinto Group of Australia and the Anglo-Australian company BHP Billiton - control 70 percent of global supply.
 
They are riding a wave of record profit from an ongoing global commodity boom fueled largely by Chinese demand for raw materials.
 
One by one last week, European and Japanese steel makers began accepting the 19 percent increase for 2006 demanded by the suppliers.
 
ThyssenKrupp of Germany was the first to acquiesce, agreeing to a 19 percent rise with CVRD on May 15.
 
Rio Tinto announced a few days later that one of its subsidiaries had inked an accord for a 19 percent increase with Japanese steel mills.
 
A day later, Mittal Steel, the world's biggest steel-making company, agreed to the new rate with CVRD.
 
China's buyers nonetheless have refused to accept the increase. In a statement posted on its Web site, the China Iron and Steel Association said Friday that negotiations would continue.
 
"Asian benchmark iron ore prices haven't been set," the association said.
 
In reports in the official Chinese media, senior steel industry officials urged suppliers to consider the prevailing market conditions in China in negotiating new prices.
 
But with prices on the international spot market for iron ore about 30 percent higher than the existing contract price, most analysts believe China's steel mills will be forced to back down.
 
"There is a spot market out there," said David Thurtell, a Sydney-based commodity analyst with Commonwealth Bank. "If the miners can't sell the tonnage, they can just put it on the spot market."
 
As the biggest buyer, China should have considerable leverage in negotiations, but industry experts warn that rapid expansion and high debt levels have undermined the industry's bargaining power.
 
Brisk growth in China's vast but frag mented steel industry has left the country with a voracious appetite for iron ore. China imported 108 million metric tons in the first four months this year, 23.5 percent more than the same period last year. Analysts estimate that Chinese steel makers will consume 40 percent of global output this year.
 
Steel is vital to China's expanding economy, but many local mills operate on extremely tight margins compared to their foreign counterparts.

Editor: Yan