Chinese steelmakers are not likely to accept the 19 per cent increase in iron ore prices agreed to by Germany's ThyssenKrupp AG, according to the China Iron and Steel Association.

The price accepted by the German company would not be taken as the global benchmark as European mills are represented by Arcelor SA in negotiations for long-term prices, while Chinese steelmakers are represented by Shanghai-based Baosteel Group, said Qi Xiangdong, deputy secretary-general of the association.

But he admitted that the agreement would have some impact on Baosteel's negotiations.

The elements of the Asian market, in particular the specific conditions of the Chinese market, must be taken into consideration in setting iron ore pricing, the association said yesterday on its website.

"Otherwise, Chinese steel companies will not accept the prices," it insisted.

The 19 per cent was above what Chinese buyers could afford, said an unnamed insider.

"Even if an increase is inevitable, China will strive to make a good deal," he said.

ThyssenKrupp reached an agreement on Monday with Brazil's Cia Vale do Rio Doce, the largest iron ore miner in the world, accepting a 19 per cent rise on iron ore prices in 2006. It is the first agreement this year between a major steelmaker and a producer.

Baosteel, Arcelor SA and Nippon Steel Corp, which represents Japanese iron ore importers, are still in talks with the world's top iron ore miners Vale and Anglo-Australian groups Rio Tinto Ltd and BHP Billiton Ltd. The talks have been prolonged by over a month compared to past agreements.

Local media said Nippon Steel Corp could only accept limited material price rises this year. The company led a 75-per cent increase in the long-term contract last year.

Vale pressed buyers to accept a 24.6 per cent increase. China Iron and Steel Association refused to accept the figure, saying it was "not rational."

According to Sydney-based Global Mining Research statistics, every 1 per cent increase in iron ore prices will add US$29.6 million to Rio's profit and US$21.4 million to BHP Billiton's profit.

China's demand for iron ore increased by 75.9 million tons and 121.8 million tons in 2004 and 2005 respectively.

In a bid to meet domestic demand, China is diversifying sources of iron ore.

China's output of iron ore is expected to increase by 77 million tons this year.

Associations of Chinese importers are looking at long-term co-operation with Indian miners, who used to focus on the short-term cash market.

The country also plans to shut down small mills with an annual production capacity lower than 200 cubic metres. The move is expected to reduce China's demand for iron ore by 60 million tons.

Source: China Daily