Big steelmakers in China yesterday shrugged off the impact of Monday’s record rise in iron ore prices, but the higher prices could increase cost pressures on smaller mills and hasten consolidation in the industry.

“The mills’ reaction has been relatively calm,” Tina Wang, a Shanghai-based steel market analyst at Steel Business Briefing, a consultancy, said. “They were prepared for this.”

The average 85 per cent price increase agreed with Rio Tinto, the Anglo-Australian miner, was within the range of expectations, analysts said. Chinese mills had been expecting a price rise of at least 65 per cent, in line with that agreed with Brazilian miner Vale this year.

Baosteel stressed yesterday that the deal “reflects the sincerity from both sides to maintain the traditional pricing mechanisms”.

“This was not the worst-case scenario” for the steelmakers, Helen Lau, a Shanghai analyst with Daiwa Securities, said. Ms Lau noted that the new price reflected only a small portion of the freight rate differential be-tween shipping Australian and Brazilian ore to China. Australian miners have argued that they should reap more benefit from the fact that it is cheaper for Chinese steelmakers to buy ore shipped from Australia.

“They [large and medium-sized steelmakers] can still maintain a long-term pricing system with the Australian miners,” and avoid higher-priced spot market purchases, Ms Wang said.

But analysts said thousands of smaller Chinese mills could be affected if the pricing agreement leads to higher spot prices, hastening consolidation in the steel industry. Smaller mills buy iron ore on the spot market and are unable to lock in prices by annual contract.

“The Chinese government wants to consolidate the industry so that everyone can buy on contract basis and enhance their bargaining power,” Ms Lau said.

She said the effect on Baosteel would be limited, increasing unit production cost by only $17, which could easily be covered by a 3 per cent Baosteel price rise.