The iron and steel industry is likely to face a more serious profit crisis once factors influencing iron ore prices fully emerge in the second quarter when steel markets begin to consolidate.

The report released by CISA shows that China's 77 large and medium steel mills achieved sales income of nearly 669.5 billion RMB, 42.5 percent higher over the same period last year, and net profit of about 21.8 billion RMB, 3.25 percent of profit margin, in the first quarter.

The average CIF price of imported iron ore was 96.3 U.S. dollars per ton in the first quarter of 2010, 20.7 percent higher than the corresponding period last year. The price is still well below that of current iron ore spot price, which is around 190 U.S. dollars per ton.

Since the beginning of this year, prices of steel products has risen by nearly 1,000 yuan per ton due to the expectation of rising iron ore prices. The overall profit margin of the iron and steel industry, nonetheless, was merely 3.25 percent in the first quarter, which is causing anxiety to some industry insiders. They are worried this trend may continue in the following quarters.

Luo Bingsheng, vice executive chairman of the CISA, said yesterday that the iron ore market is currently in short supply and steel enterprises may negotiate the three iron ore giants (BHP Billiton, Rio Tinto and Vale SA).

Liu Zhenjiang, vice-chairman of the CISA also pointed that "factors influencing iron ore prices will emerge in the late second quarter." Having exhausted low-price storage, steel enterprises will endure high-price minerals and further increasing production costs.

Steel prices, however, already revealed signs of declining though the production costs have gone up. This situation further increases the risk of steel enterprises.

"With an increase of production, supply, storage and raw material costs, steel enterprises are facing deteriorated profitability," said Li Xinchuang, director of the Metallurgical Industry Planning Research Institute at an industry conference.