China's steelmakers will suffer heavy financial losses unless they curb spot iron ore imports, the China Iron and Steel Association (CISA) warned on Wednesday.

The warning came as the end-of-the-month deadline for iron ore price talks with Australian miners draws near and Beijing worries that rampant imports have given miners the upper hand.

China's iron ore imports rose 20 percent in the first five months of 2008, and Australian iron ore miners are pointing to that strong demand to support their attempts to wring out a big price rise before the deadline for the 2008 contract expires.

We hope the members will pay attention to the situation and control the quantities and pace of the iron ore imports in accordance with mills' actual production demand, the association said.

An association official said iron ore stockpiles at already clogged Chinese ports will rise further if the pace of imports is maintained and could cost the country's steel mills dearly by tying up working capital and risking big losses should prices fall.

It is very obvious. Firstly, massive iron ore imports will use up more cash in the company and add to mills' operating costs, said Qi Xiangdong, vice secretary general of CISA.

Secondly, mills should judge the supply and demand situation carefully. If prices fall in coming months, the weighty stockpiles will devalue and cause losses.

The association said it saw limited price growth for iron ore land in China on a cost, insurance and freight (CIF) basis, adding that high prices do not represent the true supply and demand picture in the world's largest steelmaker.

CISA is probably concerned that merchants are going out into the spot market and buying big tonnages, which is driving up spot prices and therefore strengthening the position of the miners, said John Kemp, an economist at RBS Sempra in London.

It's a little late in the day, but this is an attempt to discourage speculative imports that may have artificially inflated spot prices. It may give some short-term relief, but it won't change the dynamics of the contract talks very much.

In May, a Chinese industry group urged major steel mills to limit their iron ore imports after port stocks in northern China were estimated to have surpassed a record 80 million tonnes and imports continued to arrive faster than stocks could be sold.

The order was formally repeated by China's National Development and Reform Commission, the country's top economic planning body, last week.

But many steel mills are still building up stocks, traders said, as they expect strong demand in coming months as pollution control measures ahead of the summer Olympics in Beijing in August force local iron miners in the region to halt operations.

Asian steel makers are locked in price negotiations. Miners Rio Tinto and BHP Billiton are trying to win better prices for the year that began on April 1 than the roughly 70 percent increase won by Brazilian miner Vale (Editing by Nick Trevethan and Ben Tan)

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