China's iron and steel firms cannot afford an increase in iron ore prices this year.

That is according to a statement yesterday from the Ministry of Commerce and the National Development & Reform Commission.

"Chinese steel and iron enterprises are facing many problems so China cannot accept another price rise. The companies' costs keep increasing while their profits drop," the statement said.

The government also criticized some overseas multinational iron ore suppliers for taking advantage of their monopolies and accumulating unreasonably high profits.

It said the bad practices of such firms violated the spirit of fair trade.

"The government's role is necessary for big deals; foreign parties are monopolies while Chinese parties are diversified and do not have significant bargaining power," said Mei Xinyu, a researcher with the Research Institute of the Ministry of Commerce.

Chinese iron ore traders and steel makers, led by the Shanghai-based Baosteel Group, are currently in talks for long-term iron ore prices with BHP Billiton Ltd, Rio Tinto Group from Australia and Companhia Vale do Rio Doce from Brazil.

Since the two sides have not yet reached a consensus, negotiations are likely to extend beyond April, when deliveries for the next year begin.

That means that prices set last year will be in force until a new agreement is reached.

Last year Chinese mills and iron ore traders accepted a 71.5 per cent rise in iron ore prices. This year suppliers are seeking increases of up to 20 per cent to take advantage of soaring demand in China.

The commerce ministry said it would take measures to protect the interests of the country and domestic companies from being hurt.

The ministry said it would help close down small-scale mills, a move which is expected to reduce China's demand for iron ore by 60 million tons. According to the national policy for steel industry development, China will this year close down all small mills with an annual production capacity of less than 200 cubic metres.

The government also said it would reduce the growth rate of domestic steel production which would mean less iron ore is needed.

The government agency has started to inspect the quantity, price and origin of iron ore imports, a move to avoid importing over-priced ore.

The ministry has also banned iron ore dealers from providing ore to those small mills which heavily pollute the atmosphere and are not very efficient.

Figures from customs show that in 2005, China imported 275 million tons of iron ore, accounting for 43 per cent of the world's total ore shipment.

Source: China Daily