China's 77 large- and medium-sized steel mills reported lower than expected profit margins last year, mostly due to high raw material costs, according to a report from the China Iron and Steel Association released Thursday.

In 2010, the 77 steel producers reported a total profit of 89.71 billion yuan ($13.64 billion), up 52.02 percent year on year, but the average profit margin was only 2.91 percent, far below the country's industrial average.

"The profit margin for small steel mills would be even lower,"said Wang Guoqing, an analyst with Beijing Lange Steel Information Research Center, saying that rising iron ore prices have exerted great pressure on the industry.

Earlier this month, Australian mining giant BHP Billiton raised its FOB iron ore prices to $168 per ton, up 8.4 percent. With the additional transportation cost, iron ore prices could reach as much as $200 per ton, which, according to Wang, is the highest in the past two years.

Luo Bingsheng, an official with the Iron and Steel Association, commented that rising costs have been the major reason for the industry's low profit margin over the past year.

In 2010, China imported some 618.64 million tons of iron ore, 9.13 million less than the previous year. But the cost surged to $79.43 billion, $29.28 billion more compared with 2009.

Iron ore price negotiation is complicated by the fact that the three global mining giants, Rio Tinto, BHP Billiton and Xstrata, have monopolized about 70 percent of the international iron ore trade, noted Luo, who called for a win-win pricing mechanism based on equal negotiation.

Luo also suggested that the government should build strategic reserves for iron ore to stabilize iron ore prices.

Lange Steel's Wang said that iron ore prices could continue to rise, since India, a major source of China's iron ore besides the three mining giants, has greatly raised its iron ore export duty over the past year, further tightening iron ore supplies.

But according to Iron and Steel Association's Luo, the current "astronomical"price will not last long, and pressures on iron ore supply will be eased in the second half of this year.

"With domestic iron ore production expected to grow at about 20 percent this year and the country's increasing control on overseas iron ore mines, importation of iron ore should stay stable in the next few years,"said Luo.

In 2010, about 40 percent of China's iron ore was produced domestically. In 2015, this number is expected to grow to 45 percent. China's dependence on imported iron ore dropped to 60 percent in 2010 from 62.5 percent in 2009, the first drop in 10 years.