Oct. 19 (Bloomberg) -- Baosteel Group Corp., China's biggest steelmaker, said iron ore supplies are lagging behind demand from the country's mills, indicating it may struggle to hold down prices in talks with mining companies led by BHP Billiton Ltd.

``Supply isn't meeting demand,'' Chairman Xu Lejiang told reporters during the Communist Party congress in Beijing today. ``China's steel industry grew very fast this year.''

Baosteel may have to accept a bigger increase in benchmark iron-ore prices than the 9.5 percent gain it negotiated at the end of 2006, the smallest advance in four years. Prices of the material surged last month to more than triple the 2007 benchmark. Annual contract talks start this month for shipments from April.

``The market is expecting iron ore prices to go up by 25 percent to 50 percent, and that's a reflection of the tightness in the market,'' Ric Ronge, who helps manage A$1.9 billion ($1.7 billion) at Pengana Capital, said in Melbourne. ``Baosteel and the steelmakers would have to pass on the cost to customers.''

China wants to hold down costs as steel mills seek to meet demand for cars, railroads and buildings and the government tries to curb inflation. The country has doubled steel output in the past four years to exceed the combined production of the U.S., Russia and Japan.

Shanghai-based Baosteel plans to more than double capacity to 80 million tons from the current 30 million tons by building new plants and acquisitions, the company said Sept. 4. ArcelorMittal, the world's biggest steelmaker, produced 118 million tons last year.

Steelmakers in China may boost production by a fifth this year to 500 million metric tons.

Record Profits

The increase will provide record profits for companies such as BHP, the world's biggest mining company, and Cia. Vale do Rio Doce, the world's largest iron-ore producer. Brazil's Vale may double earnings from iron ore by 2009, according to Citigroup Inc.

Cash prices for iron ore surged to $185 a ton, compared with the 2007 benchmark Australian price for long-term contracts of $51.47, Credit Suisse Group said Sept. 28.

Vale, BHP and Rio Tinto Group may raise prices 30 percent, according to the median forecast of eight analysts surveyed by Bloomberg last month.

China's steelmakers may face lower profit margins as the government seeks to rein in exports, which can offer higher prices, and curb inflation. Steel exports dropped in September for the fourth straight month, reaching a seven-month low, after the government reduced tax breaks and raised shipment duties.

Exports to Fall

``Steel exports will keep decreasing in the second half and next year, while the government may introduce more policies'' to curb shipments, Xu said today.

Baosteel, which sold shares of its unit Baoshan Iron & Steel Co. for the first time in 2000 in Shanghai, still intends to list its shares abroad, Xu said today. Baoshan Iron & Steel said a year ago it planned a foreign public offering by 2010.

``We've never given up the plan to list overseas, but we haven't decided the timing or market,'' Xu said today.

To contact the reporter for this story: Zhao Yidi in Beijing at yzhao7@bloomberg.netHelen Yuan in Shanghai at hyuan@bloomberg.net

Last Updated: October 19, 2007 03:13 EDT