CHINA should tap its vast foreign-exchange reserves to build strategic reserves of iron ore to thwart the bargaining power of global mining giants, an industry official said yesterday.

China, whose steel industry is struggling with high costs, will also invest more in overseas ore projects to cut reliance on the three global miners - Brazil's Vale, Anglo-Australian Rio Tinto and BHP Billiton.

"China should use its foreign-exchange reserves to build reserves of resources that we don't have but badly need," said Luo Bingsheng, who this month retired as vice chairman of the China Iron and Steel Association and is now its special advisor.

But some analysts questioned where the ore can be stockpiled and how to allocate the stocks fairly among the nation's mills, many in the private sector.

Higher ore price are eroding margins in China's steel sector while boosting the ore miners' earnings to a record. The 77 large and medium steel makers tracked by the CISA made a combined profit of 89.7 billion yuan (US$13.6 billion) last year, up 52 percent from 2009, but the margins were only 2.9 percent. BHP alone earned US$17.1 billion in 2010.

The Steel Index spot price for 62-percent iron ore arriving at Tianjin port in north China rose to US$191.9 a ton on February 16, the highest since the data was available in November 2008.

Luo added ore supply will remain tight in the first half of this year but the tightness could ease in the second half. China imported 682 million tons of iron ore last year, 1.46 percent less than in 2009.

The three mining giants last year dismantled decades-long practices of annual pricing in favor of quarterly pricing as spot prices rose. Luo said some contracts are moving to a monthly basis and miners now prefer direct talks with individual Chinese mills.

The CISA also urged the setup of strategic reserves for coal.