According to industry insiders surging spot prices of iron ore are forcing steel mills to look for more domestic supplies, something that would also reduce their dependence on costly imports.
A sales manager from Ye-Steel who declined to be named said "We are now buying domestic iron ore with a 66% iron content priced at CNY 1,080 per ton including tax, much cheaper than imported ore. The company is one of several steelmakers choosing domestic iron ore sources more often.”
Mr Xu Xiangchun Industry analyst from consulting firm Mysteel said that since the spot price of imported iron ore is higher, many steel mills have increased offtake from domestic sources, especially from Hebei province where most of China's mines are located. He said that this should help to keep rising imported iron ore prices in check.
He added that as to whether the domestic sourcing option will impact annual benchmark price talks which are currently ongoing are hard to say.
Ye Steel sales manager said domestic ore accounted for a mere 5% of the company's raw material consumption in 2009, as the global financial crisis weighed on imported ore prices. But after spot prices of imported iron ore rose to a record high this year, he expects domestic supplies to account for 30% of the company raw material usage in 2010. Since the domestic ore has a lower percentage of iron, it comes with higher mining costs attached to it.
Mr Xu said low-priced spot ore imports last year squeezed domestic miners' margins, even pushing some out of business. But when imported ore prices jumped above domestic pricing levels, China miners shifted back to sourcing from the local markets. He said that domestic iron ore production stood at 200 million tonnes in 2009 and is likely to rise by 20% in 2010.
Chinese steel mills are at a disadvantage in the annual iron ore price talks due to the large number of steel firms scattered across the nation, and their high dependence on imported iron ore.