Industry analysts said steel mills would be forced to accept the 50 percent price hike, even though it may squeeze their profits further.

Official data shows that the average profit ratio of Chinese steel mills declined to 2.2 percent in 2009, down 53.4 percent from the previous year.

Chinese steel mills have always been disadvantaged in the annual iron ore price talks due to the low concentration of the industry and galloping demand.

Steel output is expected to rise 8.6 percent this year to 621.5 million tons thanks to the government's 4 trillion yuan stimulus plan. Steel mills increased iron ore imports by 42 percent to a record 628 million tons last year, further boosting expectations of an increase in the annual contract prices.

Meanwhile spot iron ore prices surged to a record high this week, further complicating the negotiations.

Prices of 63.5 percent iron ore rose to an 18-month high at $142 per ton including freight on Monday, more than double the benchmark prices settled in 2009.

Investment bank Morgan Stanley raised its forecast this week for 2010 prices to go up by 60 percent compared with a 20 percent increase earlier.

"Our company will feel the heat if this year's contract prices go up by 50 percent. We will be forced to increase delivery prices of steel products to offset the high raw material costs," said the managing director of a Jiangxi-based steel company. "It is not clear whether the market would digest the product price hikes as steel stocks are still high."

Steel stocks in 26 major Chinese cities rose to 15.86 million tons on Feb 22, up 51 percent from a year ago, according to data from Mysteel.com.