China buys Indian ore as steel exports lift output

Hong Kong, Nov 17: Chinese steel mills are placing more orders for Indian iron ore as strong overseas demand is fuelling the country's steel production to record levels despite attempts by Beijing to rein in the sector.

Iron ore traders in China said prices for mid-grade spot Indian iron ore cargoes rose to - a tonne, including cost and freight, from - about a month ago, in line with the price increases in domestic iron ore.

With higher freight rates pushing up Brazilian ore prices to about , delivered to China, small and medium-sized mills are shifting to lower-priced Indian and domestic ore due to uncertainty over exports following tax changes, they said.

''Demand is strong. Indian ore prices have risen over the past two to three weeks,'' a trader in Beijing said.

''Crude steel prices are okay. They lost 100 yuan since the tax changes, the trader added, referring to Chinese prices in tonnes. But there are still profit margins for mills. I expect strong production to continue in the fourth quarter.'' In September, China's imports of Indian iron ore fell 12.9 percent year-on-year to 4.98 million tonnes, but imports in the first nine months was up 11.2 percent at 58.35 million tonnes.

China's crude steel output in the same period climbed 18.4 percent to 339.03 million tonnes, compared with 349.36 million tonnes in the whole of 2005.

China's October output of crude steel and steel product hit a monthly record of 37.68 million tonnes and 41.59 million tonnes, respectively, while steel product exports stood at 4.25 million tonnes, slightly below a record 4.43 million tonnes in June.

China has emerged as the world's top steel exporter so far this year, shipping 32.85 million tonnes -- an equivalent of nearly a third of U.S. annual output -- in the first 10 months.

With such strong steel output, the traders were puzzled by a drop in October iron ore imports to 21.97 million tonnes -- the lowest since July last year.

They said the longer-than-usual monsoon season had hampered a pick up in exports from western India. But some saw it as a sign of limited supplies as India needs more iron ore itself.

''They cannot increase exports much, said an executive at an international company, referring to India. ''I expect next year the increase to come more from Brazil and Australia'' DOMESTIC ORE, TAX CHANGES The traders said a large rise in domestic iron ore output was also helping steel mills to restrict growth in imports.

In October, China produced a record 55.49 million tonnes of iron ore, up 41.4 percent year-on-year, pushing up the total for the first 10 months by 38.0 percent to 462.31 million tonnes.

Chinese mills are hoping that higher domestic output will help fend off a rise in 2007 benchmark prices in the negotiations with top miners, such as Brazil's CVRD , Rio Tinto Plc and BHP Billiton .

One industry source said the miners had met China's top steel producer Baosteel Group last week for the first discussion over the prices, which would take effect from April.

Although Chinese ore is known to be of inferior quality, some said they were using more sophisticated technology to process it into concentrate with 65 percent iron content.

Still, a senior trader from a Chinese house said: ''Personally I think prices will go up, although not on a big scale. Maybe something like 5 percent.'' South Korea's POSCO has said major producers expected prices to rise less than 10 percent next year.

Traders and shipping officials saw little immediate impact from changes in taxes aimed at curbing exports of energy-intensive products, such as steel and aluminium.

''I believe strong exports will continue until the first quarter of next year,'' said a shipping executive at a Chinese company.

''Only 15 percent of the total volume is affected.

Reuters