Chinese buyers expecting lower iron ore prices

CHINESE mills and traders, as well as Australian miners, expect iron ore prices to fall by at least 10 per cent later in the year as the world's biggest steelmaking nation steps up the overhaul of the sector as part of the country's new Five Year Plan.

China's largest steelmaker, Baosteel, lifted its prices this week for the third month in a row even as it continued its acquisition and expansion binge, but authorities signalled that overall output growth in the sector was planned to slow this year.

Another top-five Chinese steelmaker, Wuhan Steel, and Japan Nippon Steel have also increased their prices in recent days.

As well as higher iron ore prices, steelmakers have faced higher coking coal costs because of flooding in Queensland.

Ironically, higher steel prices will feed into Australian inflation as we buy back finished steel products from China, Japan and South Korea.

But traders and mill staff predict that while high iron ore prices will continue for several months, they will fall back in the second half of the year.

One mining executive predicts they will fall by about 10 per cent, a similar prediction to that made by a Chinese steel company executive.

A recent report from China's Shanxi Securities says consolidation in the Chinese sector -- in part designed to combat the oligopoly power of the three mining majors, Vale, Rio Tinto and BHP Billiton -- accelerated in late 2010.

It says this will be the main theme for the sector in 2011, with Baosteel, Hebei Steel Group, Ansteel and other major steel groups all expanding by buying private mills and smaller government-run operations as well as developing more modern and cleaner production capacity.

The report says the steel sector plan for China's 12th Five Year Plan -- which runs from 2011 to 2015 -- is being finalised and that several huge steel groups will be formed, a long-held aim of the Chinese government.

As well as a "structural optimisation" aimed at strengthening China's negotiating position for raw materials, the plan is believed to target lower energy costs and lower emissions.

Last month, the Hebei Steel Group acquired a share of seven private steel companies in Hebei province, the biggest steelmaking region in China.

Shandong Steel is trying to consolidate the industry in one of China's most populous provinces and Fortescue Metal shareholder Hunan Valin is keen to list on the stockmarket.

Baosteel is creating a new steel venture in the southern industrial province of Guangdong after buying Guangzhou Steel and Shao Steel.