China seeks more influence in setting iron ore prices

China is making headway on a decade-long program to create giant mining groups so it can play a bigger role in negotiating iron ore prices with more established rivals in the world.

The country plans to establish a large mining conglomerate focusing on iron ore extraction and smelting operations led by Liaoning-based Ansteel Group, a large State-owned iron and steel manufacturer, Beijing-based China

Metallurgical Mining Enterprise Association said in a statement on Thursday.

"Ansteel Group will acquire a number of mining enterprises to complete the integration work over the coming years and eventually possess an annual iron ore production capacity of 200 million metric tons in 2025," said Shao Anlin, deputy general manager of Ansteel Group.

In the meantime, up to eight large mining groups will also be integrated and established throughout China. Each individual group's production capacity of iron ore will exceed 30 million metric tons a year after a decade.

China is the world's fourth-largest iron ore producer with more than 70 billion metric tons of resources. But the nation's dependence on foreign iron ore rose to 70 percent last year. The country's domestic steel industry has spent more than 2 trillion yuan ($321 billion) on paying high prices for iron ore from the global market over the past 10 years.

To optimize the resources of domestic companies, the Ministry of Industry and Information Technology is working with related government departments and industry associations to draft a plan to restructure China's iron ore sector between 2016 and 2025. This document will be completed and submitted to the State Council by the end of this year.

Even though China produced 779 million metric tons of crude steel and 1.07 billion metric tons of steel products, more than any other nation in 2013, its steel sector is weak because of the low quality of raw materials provided by domestic miners compared with the same products shipped from Australia or Brazil. Their prices are twice as high as Chinese iron ore.

China's iron ore imports amounted to 820 million metric tons in 2013, up 10.2 percent from a year earlier, data from the General Administration of Customs shows. China produced 1.4 billion metric tons of iron ore in the same year.

The world's three biggest miners BHP Billiton, Rio Tinto Plc and Vale SA are China's main sources for imported iron ore. The companies have margins that have exceeded 50 percent over the past decade because they have sufficient capital support, advanced mining technology and a large number of rich mines in different continents, according to a report by China Chamber of International Commerce released last year.

These advantages have enabled foreign companies with low iron ore production costs to mine the resource for around $50 a metric ton. However, Chinese miners are having difficulty in coping with price volatility and their production costs are between $100 and $110 a metric ton.

"The disparity is clear. The production cost of Chinese companies is likely to rise because labor, equipment and cash flow are in short supply," said Ding Rijia, a professor at the China University of Mining and Technology in Beijing. "It even costs more to dig new mines with rich iron ore deposits in China today."

Ding said Australian and Brazilian iron ore producers are likely to set their prices between $120 and $125 a metric ton this year, which will savage Chinese iron ore enterprises. As a result, China will purchase more iron ore from major international sellers and produce less iron ore in its own marketplace.

"With profound changes in the world market, it is time for China to strengthen its competitive power to secure its iron ore supplies and stabilize its price in the world market," said Zhao Zhihua, an analyst at the mineral resource department of CITIC Metal Co in Beijing.

Zhao said China's new round of investment in urbanization projects such as subway lines in more second-tier cities, bridges and new railway lines in its western region will continue to keep the demand for iron ore high this year.