China steel industry faces "cost crisis"

China's steel industry faces a "cost crisis," as dropping demand for steel drives prices below the cost of raw materials, a senior adviser to the China Iron and Steel Association (CISA) said on Friday.

Spot iron ore prices have dropped below term prices for the first time in years, as steelmakers bank blast furnaces to avoid producing steel for a higher cost than they can sell it.

"Chinese steel mills are facing a cost crisis. Almost all Chinese mills are suffering losses on the basis of current steel prices and long-term iron ore prices this year," Wu Xichun told an industry conference in the Chinese port city of Qingdao.

"The financial crisis just started to impact the global industry. Metal demand is sliding seriously globally, as people lose confidence."

Wu said iron ore suppliers should also make efforts to overcome the crisis in the steel industry, in order to avoid demand slumping for iron ore.

Wu's comments came one day after another CISA executive, Shan Shanghua, said China's steel industry would seek a unified annual iron ore price from Brazilian, Australian and Indian miners in 2009 pricing negotiations.

Miners and steel mills are gathered in Qingdao, a port city in eastern China, in a conference which is considered the informal start of annual negotiations for next year's long-term contracted iron ore prices.