China's huge reserves of scrap steel could substitute for iron ore reduce the steel industry's dependence on overseas mining monopolies.

Annual demand for scrap steel in China reached 72 million tons in 2008, the highest in the world. Scrap is a substitute for iron ore as raw material for the steel industry and could help reduce dependence on the international mining monopolies.

Faced with price hikes from the three big miners, Rio Tinto, BHP Billiton and Vale, some Chinese steel makers have broken ranks and accepted the new terms.

"The steel association is trying to bring some order to the iron ore market in the country but individual steel makers are desperate to resume production and maximize profits. The two aims are incompatible," a steel analyst said.

"The purchase price is likely to soar to US$175 per ton, well over the contracted quarterly price of US$100."

The analyst said that at these prices, steelmakers would find it difficult to remain profitable.

The industry's plight is made worse by a downward trend in steel prices, ending several months of price rises. Government measures aimed at protecting downstream businesses are a factor inhibiting price hikes.

The industry would like to reduce its dependence on imports which account for 62 percent of China's iron ore demand.

Chinese steel mills are actively seeking other overseas iron ore vendors, in an attempt to reduce dependence on the Australian and Brazilian mining monopolies.

They are also looking inside China to increase their use of scrap steel, taking advantage of relatively high volumes of scrap steel stocks.

Electric furnaces are used to make steel from scrap. In China, electric furnaces produce just 10 percent of gross steel output, whereas the global average is more than 30 percent and in some advanced countries reaches 50 percent. Building up this sector would, in the long term, help meet the steel mills' insatiable demand for raw materials.