BEIJING, Nov 15 (Reuters) Chinese steel mills produced a record 42.92 million tonnes of crude steel in October, but declining inventories of iron ore could force some mills to reduce output this month, data from the National Bureau of Statistics showed on Thursday.
The world's largest steel producer is on track to produce between 490 million and 500 million tonnes of crude steel this year, in line with most analysts' expectations, and further supporting the outlook for higher iron ore prices next year.
Chinese crude steel output for the first 10 months of the year was up 18 percent at 409 million tonnes, while October's 42.92 million tonnes represented a rise of 13.5 percent on year.
But steel mills' production came on the back of rising raw materials costs, and sky-high freight rates caused some importers to defer cargoes, tightening supplies.
''Iron ore stocks are low, there's nothing left in the ports,'' said a trader at a private mill in the coastal province of Shandong.
''People didn't want to import because costs were spiraling upwards. Some are already considering closing furnaces for a little while.'' Mills deferred iron ore cargoes from Brazil over the last two months to avoid crippling freight rates, creating a backlog of imports that will inflate iron ore imports through the end of this year and into next year, shippers said.
That should help support freight rates for the next few months, keeping the price for imported iron ore high and further weakening China's ability to cap the rise in term iron ore prices for the year beginning in April.
For a table of China's steel, coal, coke and iron ore output, please click on [ID:nBJE000023].
IRON ORE TALKS Negotiations begin soon between Asian steel mills and miners BHP Billiton , Rio Tinto , and Companhia Vale do Rio Doce, or CVRD .
This year there is an added complication, because BHP has proposed a 0 billion takeover of Rio Tinto, creating an Australian mining giant that would control 27 percent of the world market for iron ore, and about 40 percent of China's imports.
BHP CEO Marius Kloppers is due to visit Beijing next week, after he visits clients in Japan and South Korea [ID:nSYD258362].
Although Beijing is trying to gain more control over iron ore prices, it is hampered by the low quality of domestic iron ore output and the fragmented steel industry itself, which competes fiercely for iron ore supply, driving prices up.
Iron ore output in China rose 22 percent in the first 10 months of this year, to 566.83 million tonnes, but still meets roughly half of demand.
Domestic output hit a record in June, but has fallen steadily for the last fourth months, despite record prices, thanks to water shortages in the summer and government crackdowns on small iron ore mines.
REUTERS BJR RS1409