Rising imported iron ore prices are set to drive up domestic ore prices and force Chinese steel companies to raise the cost of products to counteract possible heavier manufacturing expenses in 2010, a senior official from China's steel association said Tuesday.

The news emerged as the Chinese government said it was "closely watching" annual iron ore price talks and urged miners to reach a "fair" price quickly with the world's largest buyer of the steelmaking ingredient.

Baosteel Group Corp will negotiate on behalf of Chinese steelmakers, said Zhu Hongren, a spokesman for the Ministry of Industry and Information Technology. Prices should be set by market forces, he added.

China failed to reach a price agreement last year with Rio Tinto Group, BHP Billiton Ltd and Vale SA, the world's three biggest iron ore suppliers, after they rejected its demand for a cut bigger than the 33 percent offered.

China last year increased iron ore imports by 42 percent to a record 628 million metric tons as demand expanded because of its US$586 billion stimulus spending. Benchmark contract prices may surge 50 percent this year, Nomura Holdings Inc forecast on January 11.

China wants to set iron ore prices separately from the rest of the world to exercise its bargaining power as the largest buyer, the China Iron & Steel Association (CISA) said on October 16.

Because the talks are a commercial matter, negotiators should stick to confidential rules and not leak any details until the result is decided, said Luo Bingsheng, CISA vice-chairman said at a media briefing.

Chinese media reported earlier that Australia's big miners, together with Japanese and South Korean steel mills, have come to a mutual agreement for a 40 percent rise in 2010's long term iron ore prices compared with the price agreed in 2009.

Industry analysts said this could send a negative signal to Chinese steelmakers if global miners and Japanese and South Korean steel mills reached a price agreement first because the latter two held stakes in the three global miners and didn't mind settling for a relatively high price.

After last year's impasse in negotiations, Chinese steel mills turned to spot markets or signed individual contracts with the big three for a 33 percent cut without making it public.

However, Luo emphasized that Chinese steelmakers paid 34 percent less for imported iron ore in 2009 than 2008 on average, indicating Chinese steel mils ended up with a better deal without reaching the benchmark.

The spot prices were weighed down heavily in the first half of 2009 due to the global financial crisis.

Surplus imports caused pressure at Chinese seaports, as well as high inventories for steel mills, propping up spot iron ore prices and making the talks tricky, said Luo.

China should work to reduce excessive iron ore imports because this disrupts the iron ore market and affects price negotiations, he said, adding that reducing the number of licensed importers and promoting the agent system at a unified price for iron ore will be primary targets for CISA this year.

He said China must insist on a unified iron ore price for all imports, erasing the differences between long-term prices and spot prices, and all iron ore imports should be registered.

"We have won government support to improve the regulation of iron ore imports," said Luo, without revealing when the regulations would come into effect.

(China Daily February 10, 2010)