Oct. 31 (Bloomberg) -- Iron ore prices may decline next year as supplies improve, Luo Bingsheng, vice chairman of the China Iron and Steel Association, said as China's biggest steel mills and global miners prepare to open annual contract talks.

``Next year, iron ore prices will stabilize; we can't rule out a possibility that prices may fall slightly,'' Luo said in an interview in Beijing today at a conference. ``The iron ore supply status will get better next year.''

Steelmakers in China, the world's biggest iron ore importer, have been trying to resist gains in the raw material's cost even as usage rises in what has become a test of the nation's ability to influence world commodity prices. Soaring demand and limited mine growth have pushed ore prices higher for four straight years, with a 19 percent gain this year to a record.

``We expect iron ore prices to rise 5 percent in 2007 because global steel prices have rebounded this year on rising demand,'' Geoffrey Cheng, Hong Kong-based analyst with Daiwa Institute of Research, said by phone today.

The mills' talks with suppliers BHP Billiton, Rio Tinto Group and Brazil's Cia. Vale do Rio Doce start in November, Xu Lejiang, president of Baosteel Group Corp., said yesterday. Baosteel, China's biggest steelmaker, will represent the nation's main ore buyers in the negotiations, which will set the price of the steelmaking raw material for the year from April 1.

China's Growth

``China's steel demand and economic growth is key to the global supply and demand, and that will continue to be the case next year,'' Luo said. The government-backed association represents China's biggest steelmakers.

Vale, BHP Billiton and Rio Tinto account for 75 percent of the global seaborne iron ore trade. China produces a third of the world's steel.

In separate remarks, Chen Ying, chief financial officer at Baoshan Iron & Steel Co., Baosteel Group's listed arm, also said that supplies of iron ore were rising.

``The iron ore supply situation has changed from tightness into basic balance, and even moving toward an oversupply in the future,'' Chen said in an Internet briefing with investors.

The China Iron and Steel Association will focus on regulating domestic iron ore importers, Luo said. It will urge local steelmakers to build long-term iron ore supply contracts with local miners, Luo said.

The nation aims to limit the supply of iron ore to smaller steelmakers and reduce the number of importers to 99 this year, from 118 last year, according to the association.

Steel Output

China's economy, which expanded at an average 9.5 percent in the past five years, fueled a 25 percent jump in steel output last year as more cars and appliances were built. The nation's crude steel output may rise 19 percent to as much as 420 million tons this year, Lu Jianhua, head of foreign trade at the Ministry of Commerce said last week.

China produces 80 percent of its steel in blast furnaces compared with a global average of 60 percent, making it reliant on iron ore, Sheffield, England-based steel consultant MEPS Europe Ltd. said earlier this year. Steel can be made either from iron ore and coke in blast furnaces, or from recycled scrap metal using electric-arc furnaces.

Iron ore prices may climb 10 percent next year, Credit Suisse Group and Goldman Sachs JBWere Pty had estimated. China International Capital Corp., the nation's biggest investment bank, expects a 5 percent drop.

`Upside Risk'

Credit Suisse, which forecast a 5 percent rise in prices a year ago, estimates ``there is a high risk to the upside,'' analysts Roger Downey and Ivan Fadel said in a report dated Oct. 26 that was written after hearing a presentation by the China Iron and Steel Association.

Prices for Australian ore may rise as much as 10 percent next year because of tight supply, the National Australia Bank Melbourne-based analyst Gerard Burg said in a report today.

China's iron ore production rose 45 percent in the first nine months of this year, but falling iron ore content of the output reduces the significance of this growth, Burg said.

``Major producers in Australia and Brazil are continuing expansion programs, however, the bulk of new capacity will come on line in late 2007,'' Burg said in his report.

To contact the reporters for this story: Xiao Yu in Beijing at yxiao@bloomberg.net; Yidi Zhao in Beijing at yzhao7@bloomberg.net

Last Updated: October 31, 2006 03:47 EST