The steel industry faces perpetually higher costs and will lose competitiveness compared with other materials as a result of a new pricing mechanism for iron ore, the head of the World Steel Organisation said on Monday.

Paolo Rocca, chairman of the steel body, said that steel prices would be consistently higher as a result of the move to spot market pricing and that the industry would also face considerably higher volatility, which would make it more difficult to plan investments.

“We will have no alternative but to try and transfer some of the increase in costs to customers,” he said. As a result, steel would inevitable face tougher competition from aluminium, plastics and other materials that can be used in its place.

He was speaking a month after the collapse of the so-called ‘benchmarking’ system of pricing iron ore in annual contracts. The system is being replaced by quarterly contracts linked to the spot market price.

The immediate impact of the new system was an 80-100 per cent increase in iron ore prices, which is expected to lead to steel prices rising by as much as a third. For much of the last decade, the benchmark system capped iron ore prices below the more volatile spot price.

The shift to the new system, which reflects the shift in the balance of power to the mining companies as a result of soaring Chinese demand over the past decade, comes at a time when the steel industry has also become increasingly critical of what it sees as the growing power of the three main iron ore miners over the commodity.

The steel industry has been sharply critical of a proposed joint venture of iron ore assets in Australia owned by BHP Billiton and Rio Tinto, which together with Vale of Brazil dominate the industry.

“We are reaching the point where the increased concentration in the iron ore sector is really changing the basis for the steel industry and is creating a competitive disadvantage against other materials,” said Mr Rocca, who was attending an industry conference in Beijing.

“It would be very negative to allow further concentration in the iron ore sector, either in terms of merging their operations or getting control over future reserves,” he said.

Shen Wenrong, head of Shagang Steel, said iron ore prices were so high compared with steel prices in China that it was not profitable to produce at the moment.

“We are not buying iron ore higher than $170. We would rather not produce,” he said. Spot prices are currently near $200 a tonne. “We have not yet reached the stage where we are cutting production but we are using our inventories instead,” he added.

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