To pay or not to pay: That's the question Chinese iron ore buyers have been asking since the Indian government imposed a duty on iron ore exports effective from March 1.

 

If importers accept the increased price, it will cost them millions of yuan each year; if they don't, they might miss out on the largest iron ore cash market.

 

However, prices are only one thing in the minds of Chinese steel makers, who must now reconsider their development strategies.

 

These steel makers have faced a plethora of problems since 2004, when all three major iron ore suppliers India, Australia and Brazil began demanding increasingly higher prices for long-term contracts.

 

China is the greatest victim of India's new tariff, because it imports 80 percent of India's exported iron ore. The duty was intended to protect the country's national iron ore resources and domestic industry.

 

China's iron and steel manufacturers' problems are rooted in their dependency on imported iron ore and their irrational expansion of capacity.

 

Of course, the best way for Chinese steel mills to reduce their dependence on iron ore imports is to improve the efficiency of their operations.

 

Despite the central government's tightened control of investment in the iron and steel industry, contracted projects in the sector still totaled 600 billion yuan by the end of last year, increasing the risk of overcapacity in the sector.

 

Rather than repeatedly invest in the low end of the sector, Chinese mills should move up the industrial chain by developing more high-value-added iron and steel products. Doing so will also help them offset the potential for foreign rivals to make dumping claims.

 

The government should also decisively shut down smaller and less efficient mills. At the same time, China must figure out how it can diversify its sources of iron ore.

 

In addition to developing iron ore mines in China, enterprises should also make better use of waste iron and steel.

 

(China Daily March 9, 2007)