Crude steel production in China, the world's largest steel maker, rose 14 percent to a record last year, further complicating this year's iron ore negotiations.

Steel output rose to 568 million tons in 2009 from 500 million tons in 2008, the National Bureau of Statistics said in a statement yesterday.

The output surge has also fueled demand for raw materials. This would further strengthen the hands of the three big miners in this year's iron ore negotiations, said Hu Kai, an analyst with consulting firm Umetals.

The big miners -- Rio, BHP and Vale -- have so far not held any major negotiations with the Chinese side, led by Baosteel, said industry sources.

In contrast, Australian miners have already held talks with Japanese steel mills for the first round, and decided to set contract prices at 2008 levels, said people familiar with the matter.

Global miners have sidelined China, their biggest customer, in the annual iron ore price negotiations and do not plan to travel to the country for talks, instead choosing Singapore as the meeting venue, said reports in the Financial Times.

The big miners already have an advantage in the negotiations as the spot prices of iron ore surged last week to a record high of US$135 per ton, driven by strong demand from the steel market.

Traditionally, annual contracts are settled at levels below the spot market prices. Last year's benchmark contract for iron ore was fixed at US$60.4 a ton, excluding freight charges.

Goldman Sachs last week altered its forecasts for 2010-11 contracts, saying annual iron ore prices could rise nearly 35 percent, up from an expected 20 percent increase.

"This year's situation is complicated as the three global miners have realized that they have nothing to lose if they fail to reach an agreement with the Chinese steel mills. Chinese steelmakers will have to sign contracts with them individually, at the same prices reached by other Asian mills, as they did in 2009," said Hu.

Last year's iron ore price negotiations reached an impasse in June after China's chief negotiator the China Iron and Steel Association insisted on a 45 percent discount over 2008's prices, rather than the 33 percent cut accepted by the Japanese and South Korean steel mills.

Hu said Chinese steel mills should look at diversifying their iron ore supplies and also explore domestic mines to reduce dependence on the three miners.

Domestic mines usually contain lower percentages of iron ore, compared with imported ore, and cost more to be explored.

(China Daily January 22, 2010)