An increase in shipping costs has been identified as one of the factors that will eat into the profits of China's steel industry this year.

A leading industry figure claims mills are taking a hit because the cost of transporting iron ore had risen by more than 25% during the past four months, as compared with the same period last year.

Luo Bingsheng, vice-chairman of China Iron & Steel Association, says this figure includes the overall costs involved with shipping iron ore to the mills, which includes insurance.

Luo says the profit margin for the domestic steel industry for the first four months of the year was 3.6%.

Along with increasing freight rates, he blames a range of factors for an expected overall surge in costs associated with steel production in 2010.

Higher iron-ore prices and depleted inventories point to a challenging year ahead for steel producers, Luo told a derivatives forum in Shanghai. He also forecasts that the industry will be hit by falling sales and a drop in prices.

The domestic steel price began to dip from last month, Luo says, quoting a 10% drop in the price of deformed steel bars to CNY 4,000 ($586) per tonne.

Another cloud on the horizon for the Chinese steel industry-possibly shipping's most active customer globally-is the widening gap between output and demand.

The International Iron & Steel Institute says that from January to April this year the gross global output of crude steel increased by 31.8%, as compared with the same period last year, yet demand for steel this year grew by only 10.7%.

However, profits at China's top steel producers had increased massively when compared to the depths of the worldwide recession.

Profit at China’s 77 large and medium-size steel makers totalled CNY 33.9bn (US$4.97bn) during 2010, as compared with a CNY 4.1bn loss during the same period last year.