It is said from industry insiders that iron ore spot prices reached a record high this week, triggered by moves from global mining firms to enhance their position in ongoing negotiations.

“The fact that traders are stockpiling steel on the prediction that steel prices will rise next year caused the market to soar,” said a sales manager at Beijing Ye-Steel Trading Co.

China’s steel stocks hit 12.18 million tons last week, up 109 percent from the same period last year and up 2.88 percent compared to last month, according to Mysteel.com.

“Even in the slack winter season, steel traders are storing stocks because they foresee an improving market next year,” the sales manager said.

China’s largest steel mill Baosteel and Anshan Steel announced plans to raise delivery prices of steel products for next month by 100 yuan to 600 yuan per ton.

Analysts said the price hike could put domestic steelmakers in a disadvantaged position in iron ore talks as raising steel prices provides more room for miners to hike prices.

The rising spot price of iron ore also put pressure on the benchmark price for the material.

The spot price for ore with a 63 percent iron content soared to $115 per ton including freight yesterday, up by $10 per ton over three weeks ago and more than 50 percent higher than the benchmark for fiscal 2009 reached by Rio Tinto, BHP Billiton, and Vale with Asia steelmakers.

Traditionally, annual contracts are settled below spot market prices. Last year’s benchmark contract for iron ore was $60.4 a ton, excluding freight charges.

Investment banks this week have altered their forecasts for 2010-11 contracts, saying annual iron ore prices could rise by up to 30 percent, up from an expected a 10 percent increase.

The annual negotiation between miners and Chinese steelmakers are likely to start in late December. Both parties aim to finish the talks before April 1.

This year’s iron ore price talks have been deadlocked since June when China’s chief negotiator, China Iron and Steel Association insisted on a 45 percent discount over the last year’s prices, after a 33 percent cut in benchmark prices had been reached by the three global miners with Japanese and South Korean steel mills.

Steel prices are anticipated to a big rise in the coming year – 2010, most iron ore producers are hiking their prices in China.

As an indicator for the steel market, the Baosteel Group Corporation (Baosteel) has raised January 2010 iron ore prices.

After the price adjustment, the main product prices of Baosteel have basically returned to their high level in 2009. The action was followed by Wuhan Iron and Steel (Group) Corp. (WISCO), Anshan Iron and Steel Group and other enterprises increasing their steel prices.

However, India witnessed another phenomenon this week when JSW Steel, India’s third largest maker of steel, has cut prices for flat products by Rs 500 a tonne in December.

Flat products are used in manufacture of automobiles and consumer goods such as refrigerators and washing machines. JSW has said it sees steel prices to be stable with an upward bias in 2010Baosteel said next year in terms of steel demand and the overall price, the situation will be greatly improved compared to this year, but the overcapacity issue will remain.

Next year’s domestic production capacity of the company may surpass 600 million tonnes. The company expects that next year China’s economic growth will rely more on domestic demand and growth in investment will be less than this year. Based on this premise, combined with reduction in vehicle purchasing tax and the possibility of continuing the home appliances to the countryside policy, the outlook for steel demand is optimistic.

Furthermore, as urbanization continues to advance, the demand for steel will be diversified, which will generate a new round of domestic steel demand. Relatively speaking, with the cooling down in investment in infrastructure, construction steel demand growth will slow in 2010.

According to Minister of industry and information technology–Li Yizhong, China, as the world’s top steelmaker, closed 16.9 million metric tons of obsolete capacity this year as part of an effort to ease domestic oversupply, .

The nation also shuttered 21.1 million tons of iron-making capacity; 800,000 tons of aluminum capacity; and 74 million tons of cement capacity, Li said today at a conference in remarks broadcast on the Internet. The figures beat targets set by the Ministry of Environmental Protection earlier this year.

China, also the world’s biggest producer of iron, cement and aluminum, is facing a severe oversupply of steel as mills expand faster than outdated plants are closed. The government is studying a “more feasible” plan to tackle steel overcapacity, Li’s ministry said on Dec. 3.

“The 2 percent cut in capacity by the Chinese steel industry is truly a spit in the ocean,” Michelle Applebaum, who runs a steel-research firm in Highland Park, Illinois, wrote in an e-mail. “Many of the country’s high-cost and polluting, older provincial mills continue to run for jobs rather than profitability,” said the analyst at Michelle Applebaum Research.

Steel capacity in China may have reached 700 million tons or more, Xiong Bilin, deputy director at the National Development and Reform Commission’s industry department, said on Dec. 3. The nation may need 549 million tons of the alloy this year, the China Iron and Steel Association said in November.

“Investment has risen too fast in some industries in recent years,” Minister Li said today in the Web cast. “There are blind expansions in steel and cement. A large amount of obsolete capacity needs to be closed.”

China had planned to shut 6 million tons of steel-making capacity and 10 million tons of iron-making capacity this year, the Ministry of Environmental Protection said on Jan. 13. The Ministry of Environmental Protection said on Nov. 13 that the government is planning measures to close plants in the steel, aluminum, coke, cement, paper and utility industries.

It is reported from China Securities Journal on Wednesday that China Ministry of Industry and Information Technology (MIIT) is planning to modify the detail policies for eliminating obsolete and inefficient production capacity of the steel industry.

Unveiled on 20 March, the Plan for Reinvigorating the Steel Industry is a document to guide the adjustment of the industry structure and eliminate obsolete and inefficient production capacity, which stated clearly that high furnaces of 300 cubic meters and below, revolving furnaces and electric furnaces of 30 tons and below have to be eliminated by the end of 2010, and high furnaces of 400 cubic meters and below should be eliminated by the end of 2011.

However, Liu Yongchang, director of the Steel Department under the former Ministry of Metallurgical Industry, told China Securities that the enforcing standard of eliminating high furnaces of 400 cubic meters and below is unreasonable to plants that produce long steel  products.

Earlier, Liu and three other department directors of the former Ministry of Metallurgical Industry have submitted suggestions to MIIT, stating that the elimination standards should be adjusted according to enterprises’ actual situations.

MIIT responded to the suggestion proactively, by setting specific research subject on that issue and conducting research in steel mills including large plants and small and midsize ones. The research was completed on 20 September, said an insider with MIIT.

The insider also told China Securities Journal that MIIT would guide enterprises to eliminate the inefficient production capacity in accordance with their own development situation, instead of enforcing the previous stiff standards.

It is reported that steel prices in China have dropped for six weeks running weighed by high stocks, but the decline was small thanks to the support from the recovering economy.

Market analysts hold that as the economy is growing steadily after a period of rapid revival. The steel industry will not go through sharp ups and downs, but is likely to enter a correction stage.

By last week, domestic steel prices had dipped for six straight weeks. However, the decline in the past three weeks has been narrowing, with rebar prices only edging down 10 yuan/ton a week on average.

Analysis of the industry information provider MySteel.com said that the building steel prices went down about 50 yuan/ton at most last week, with the decline smaller than the previous week.

However, a total of 13 rebar enterprises and 15 wire rod firms adjusted their prices last week, which indicates that the steel market has not yet stabilized.

Medium steel plate prices have been dropping but will post a smaller decline in the immediate future. The prices of hot-rolled and cold-rolled steel products will continue to correct.

According to a survey on the domestic steel mills and traders, more than a half held that the steel market would be dominated by correction in the coming period.

The Shanghai building steel market recorded an increase in stocks by 10 weeks running. A report by the China Iron and Steel Association said that in August, the steel stocks in the country’s major markets increased more than 15 percent over the previous month, and hit the second highest point of the year.

However, increasing steel demand from construction projects and restocking before the coming weeklong holiday have lent some support to the steel market.

Wang Jianhua, an analyst with MySteel, noted that the high stocks and a stable demand would exert a combined effect on the steel market.

Meanwhile, although steel prices have been falling persistently, steel plants are still unwilling to cut output as they can still make moderate profits at the current prices.

In the first 10 days of September, China’s crude steel output was estimated to be about 16.66 million tons. Daily output was about 1.66 million tons, down only 20,000 tons from last month.

It is reported from China Daily on Tuesday that the China Securities Regulatory Commission (CSRC) has approved the merger of Tangshan Iron & Steel Co. with Handan Iron & Steel and Chengde Xinxin Vanadium & Titanium Co., paving the way for Hebei Iron and Steel Group (Hebei Steel), their parent, to become the country’s second largest steelmaker.

Shares of the three arms — Handan Iron & Steel Ltd., Tangshan Iron & Steel Co., and Chengde Xinxin Vanadium & Titanium Co. — were all suspended from trading starting Sept. 17 and would resume only after the regulatory review result is publicized.

After the consolidation, the crude steel production of Tangshan Iron & Steel would touch 21.2 million tonnes, up 86.4 percent from the current 11.4 million tonnes, while Hebei Steel will have a total capacity of 330 million tonnes annually, ranking second in China and the fourth in the world.

Hebei Steel also said it would inject the assets of Xuansteel and Wuyang Steel into the listed Tangshan Iron & Steel one year after the three arms’ consolidation.

Xuansteel and Wuyang Steel are two high-quality subsidiaries of Hebei Steel, mainly producing steel plates and long steel products.

In the share swap, each Handan Iron & Steel share, price at 4.10 yuan (about 59 U.S. cents), can be exchanged for 0.775 Tangshan Iron & Steel share, and each Chengde Xinxin Vanadium & Titanium share, priced at 5.76 yuan, for 1.089 Tangshan Iron & Steel shares, priced at 5.29 yuan.

The new firm will have an aggregate market value of about 4 billion U.S. dollars.

The China Daily also said that the consolidation could bulk up China’s bargaining power in negotiations with the three global mining giants, Vale, BHP Billiton and Rio Tinto.

It is reported that Shandong Iron and Steel Group, the world’s eighth largest steel maker, is suffering a setback in its proposed takeover bid for Rizhao Iron and Steel Group over differences in the terms of the deal.

Du Shuanghua, the founder of Rizhao Steel, one of China’s most profitable non-State steel mills, is employing delaying tactics against the purchase of a 67 percent stake in the company, according to people familiar with the situation.

In addition, Du was likely to consider moving to another province to restart his steel empire, according to insiders at the company.

The acquisition, which was expected to be pushed through as early as this week, was still under discussion and would probably be finalized next week or by the beginning of September, a senior executive at Rizhao Steel told China Daily.

Another source said the protracted talks are related to the financial terms of the deal. Shandong Steel’s acquisition is not thought to be all in cash. Instead, the company is expected to inject assets such as modern equipment in return for a controlling stake.

Du tried to protect his interests in the consolidation by handing up to 30 percent of Rizhao’s core assets to Kai Yuan Holdings, a Hong Kong-listed company in January.

Although Rizhao Steel is attempting to fight the acquisition, it has to weigh the repercussions of not cooperating with local authorities.

Officials from the local environment watchdog visited Rizhao Steel recently and asked the company to stop production using two boilers, on the grounds the facilities were not in accord with environmental standards, the source from Rizhao Steel said.

A senior official of neighboring Hebei province talked to Du recently, suggesting he should move back to Hebei, where he was born and started his business making steel tubes, the source said.

The consolidation is part of a plan by the Shandong provincial government to build a quality steel production base in Rizhao city with annual capacity of 20 million tons.

Rizhao and Shandong Iron and Steel signed a letter of intent for consolidation in early November. But the deal broke up after Du moved 30 percent of his stake to Kai Yuan Holdings.

“The Shandong provincial government aims to build a large steel group that can compete on the world stage,” said Yu Liangui, a steel analyst from Mysteel. “The steel industry wants to develop a steel industrial zone along the coastline. Rizhao has an advantage over Laiwu Steel and Jinan, in terms of regional position.

“If Shandong Steel has to establish a new factory in Rizhao in response to the government’s plan to build a quality steel production base in Rizhao, it will be in a disadvantageous position if it is facing competition from Rizhao Steel.”

China, as the world’s largest producer and consumer of steel production, is at a disadvantage in the annual international iron ore negotiations because of its limited presence in the industry.

The government wants the steel industry to consolidate, with large steel mills leading the exercise.

Du established Rizhao Steel in the city of Rizhao in 2003. Now the steel mill produces 8 million tons of crude steel annually and contributes one third of GDP to the city.

The Hurun report listed Du as China’s second-wealthiest person last year, with a 35-billion-yuan fortune.

When most Chinese State-owned steel mills suffered heavy losses, Rizhao reported a net profit of about 1.8 billion yuan in the first half of 2009, while Shandong Steel, which has three times the capacity of Rizhao, reported a loss of 1.3 billion yuan.