February 29, 2008 -- A price hike of iron ore will definitely drag down the profitability of China's automakers, said experts.

Facing cost pressures brought about by price hikes of steel products as a result of surging iron ore costs, China's automakers are urged to make the following preparations:

-- To increase the utilization rate of steel products.

-- To lock up resources of major raw materials in advance.

-- To cut enterprise management cost to reduce the indirect cost of products.

-- To raise prices of motor vehicles to transfer the cost pressure.

Nippon Steel Corporation has already announced that it, together with its ROK cooperation partner Pohang Iron and Steel, has reached an agreement with CVRD on a 65 per cent and 71 per cent increase in benchmark prices for two kinds of iron ore for 2008.

The price hike has far exceeded the 30 per cent psychological anticipation of Chinese enterprises.

As iron ore accounts for over 30 per cent of the production cost of steel products, due to price hikes of iron ore, the production cost of one ton of steel may increase by 400-800 yuan (US$56-US$112). As steel enterprises have strong price negotiation capabilities, they may transfer most of the cost increases to downstream industries, leading to an increase in production costs of such industries as machine building and automobile manufacturing.

Source: Asia Pulse