Steelmakers are buying mines and mining companies to increase self-sufficiency in their key raw materials, iron ore and coking coal, which have seen prices soar over the last year.

Last week, Rio Tinto secured a record high price rise of up to 96.5 percent for iron ore from Chinese Baosteel in annual contract talks.

Coking coal spot prices have more than doubled over the last year as demand has outstripped supply and as floods in Australia early this year have restricted production. Increasingly, steel companies are trying to integrate vertically, taking control of all elements of the manufacturing process, from pit head to finishing.

ArcelorMittal has had a clear strategy of vertical integration as part of its growth plans in both its upstream and downstream businesses, a spokesman for the world's largest steelmaker told Reuters.

We are presently 45 percent self-sufficient in iron ore and are approximately 15 percent self sufficient in metallurgical coking coal, he said. The company aims to produce up to 70 percent of its own iron ore by 2012.

The moves reverse a trend in the 1990s when many steel companies sold their iron ore mines to miners such as Brazil's Vale, so that they could invest more upstream.

News of a possible merger of the world's largest mining group, BHP Billiton, with rival Rio Tinto, has also strengthened the case for integration as steelmakers fear a monopoly in the iron ore business could leave them vulnerable.

Earlier this week, a report in the Financial Times said Lakshmi Mittal, steel mogul and the main shareholder in the company was considering buying a stake in Rio Tinto to expand its iron ore interests. The company declined to comment on the report.


Europe's second biggest steelmaker, Corus owned by India's Tata Steel, said earlier this year it would explore opportunities to secure captive supplies of raw materials such as iron ore and coking coal.

The other key issue steelmakers are very concerned about is guaranteeing supply. So some of them are just looking to take a strategic position in iron ore miners or coal companies so that they can influence some of the decision making, said Peter Archbold, director at Fitch Ratings' European Corporates group.

The world's fourth biggest steel producer POSCO said earlier this week it would buy 10 percent of Australia's Macarthur Coal -- where ArcelorMittal already has almost a 20 percent stake.

Mike Walsh, director at consultancy firm Hatch Beddows, said steelmakers who are more integrated vertically, such as some American and Russian steel companies, tend to be more profitable.

Producers who have their (own) raw material have a huge structural advantage. The luckiest ones are Russians and Ukrainians and the unluckiest ones are West European companies, he said.

Still, despite rising costs, European steelmakers have so far managed to obtain healthy profits, thanks to robust demand which has allowed them to pass on their costs to customers.

But steelmakers in China, the biggest iron ore importer in the world, are not as comfortable as their Western peers -- which is forcing them either to consolidate or ramp up their efforts to secure raw materials.

In China, it's mixed picture. The larger steel producers with a higher value added product mix have to date been able to pass through the majority of the cost increases. But the smaller steel producers - of which there are still a large number in China -- are experiencing more difficulty, Archbold said.

(Reporting by Humeyra Pamuk; editing by Christopher Johnson)

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