China's rising iron ore imports implies significant rises in the price of iron ore in the long term that will see this year's tough negotiation of Australian iron ore contract prices intensify in future. 

The Fortis VM Group said in its recent Asian Metals Monthly China's rampant steel production growth was the single biggest factor underpinning the soaring price for iron ore.  

The report said that, while China was the world's biggest producer of iron ore at 520mt in 2006, representing almost a third of global production, much of this material is very low grade.

China will become more dependent on imported iron ore in future, despite the fact that its own production of iron ore has been increasing rapidly since the start of the century. Monthly imports have been growing at a much faster pace and are now almost double its own production.  

The country's iron-ore imports were more than 192mt in the first five months of this year - 20% higher than the same period of 2007. The country's iron ore imports have more than doubled from 148mt in 2003 to 375mt in 2007 and now accounts for 50% of the world's seaborne trade in iron ore.

The report said import volume was likely to again more than double to over 750mt annually over the next five years. This is a formula for long-term significant rises in the price of iron ore. It also implies that this year's tough negotiations between Chinese steel makers and Australian iron ore producers will in retrospect appear ‘mild'. 

The protracted struggle between Chinese steel producers and Australian iron miners is drawing to an end after the two sides have locked horns over this year's contract price for Australia's iron ore exports.

The Asian Metals Monthly said China's rate of steel production growth was likely to be slower this year compared to 2007, but it was still comfortably above 10%. This implied that production could reach 540mt in 2008. 

China exported about 55mt of crude steel and steel products last year, but it will probably use more than 482mt of steel it produces this year, leaving about 58mt for exports and stockpiling.

The rate of growth in steel production has fed into high growth rates in iron ore demand and largely explains the recent surge in the world spot price for iron ore.  

Thirty years ago the annual contract price for iron ore fines - the biggest traded category of iron ore - was $21.50/t for Brazilian ore shipped to Europe, compared to this year's price of $132.20/t.  Spot prices have risen even more steeply from $75/t at the start of 2007 to around $200/t today. 

The report said that, by the end of June, Australian producers would be free from their obligations under the current contract year and be able to ask for spot prices for ores that are more than double the current contract prices at about $200/t.  

The longer the Chinese steel makers stall the finalisation of contracts, the higher the price they may have to accept. Freight rates have surged since the start of contract talks and have widened the differential between the cost of shipped Brazilian and Australian iron ore.

The report suggested that ultimately a compromise would be reached that could see Australian miners accept a much higher contract price for pellets, a semi-finished iron ore product, and in exchange drop their demand for a freight premium.