March 19, 2010 / 4:36 AM / 10 years ago

UPDATE 2-China steel mills face doubling of ore prices

* Vale asks for 90-100 pct price rise on iron ore in 2010

* Chinese steel output far exceeding demand - CISA

* 49 nations take protectionist steps vs China steel-CISA (Adds Vale declines to comment in fourth paragraph)

By David Stanway

TANGSHAN, China, March 19 (Reuters) - China’s steel mills have been asked to accept a doubling of iron ore prices this year by their top supplier, Brazil’s Vale VALE5.SA, and are also facing excessive steel output, a top industry official said.

“As everybody knows, Vale has proposed a price increase of 90 percent, a price increase of 100 percent,” Luo Bingsheng, vice-chairman of the China Iron and Steel Association, told a steel conference on Friday in Tangshan, a big steel-producing town near Beijing.

“The increase in international iron ore prices will also have an impact on domestic iron ore prices and put huge pressure on domestic steelmakers.”

Vale said it had no comment when Reuters contacted its Rio de Janeiro headquarters to ask whether it had made this price proposal. Its shares were trading close to the unchanged mark in Sao Paulo at 47.42 reais ($26.46) on Friday.

Luo said China’s steel output in the first two months of this year far exceeded demand and exports may drop further, while a rise in inventories remained a risk to the sector.

“We shouldn’t be overly optimistic about the market,” he said.

Luo painted a gloomy outlook for Chinese steel mills in 2010. They have yet to fix term prices for iron ore with Vale and the other two big suppliers, Rio Tinto (RIO.AX)(RIO.L) and BHP Billiton (BHP.AX)BLT.L, having failed to win the deep price cut they were hoping for in 2009.

Surging levels of fixed-asset investment in China would still have a positive impact on steel demand in 2010, but overcapacity was likely to restrict profit and a possible fall in exports would limit growth, Luo said.

“Looking at the market as a whole, Chinese steel mills are still producing too much,” he said.

National steel production hit a record 1.8 million tonnes per day in February, but a modest revival in net exports of steel products has stalled in the last two months.

Luo said 49 countries had initiated protectionist measures against Chinese steel. The drop in exports had exacerbated the problem of domestic supply outstripping demand.

“Everybody knows that iron ore costs are going to rise, and this is pushing up steel prices, as we’ve seen in the last week.”

The CISA previously said the raw material price increases were far higher than the subsequent steel price rises because of overcapacity. Conversely, the sector thrived last year because iron ore costs fell far quicker in the domestic market.

“In 2009, steel mill costs were down 28.49 percent while steel prices fell 22 percent, which lent support to the industry,” Luo said.

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