It will be the end of a boom. For the past four years, there have few better businesses than selling steel in China. As the economy took off, demand soared. Everyone from shipbuilders and container manufacturers to carmakers and the construction industry needed more and more steel.

Prices have leapt. From about US$222 in late 2001, the selling price of Chinese cold-rolled steel has rocketed to US$750 per tonne today.

The profits have been enormous. Last month, Wuhan Iron and Steel, China's third-biggest steel company, reported net profit increasing 463 per cent last year from the previous year.

A performance like that will be hard to sustain. Despite their achievement in beating BHP down on its iron ore prices, China's steel companies will still face sharply higher raw materials costs this year.

The benchmark contract price increase for iron ore this year was set back in February when Japan's Nippon Steel and the world's largest ore producer, Brazil's Companhia Vale do Rio Doce (CVRD), stunned the market by agreeing on a whopping 71.5 per cent price rise from levels last year.

In the past, the world's two other big ore-mining companies, Rio Tinto and BHP, had fallen into line with CVRD, but this year BHP scented an opportunity. With freight charges from Australia more than US$20 a tonne cheaper than from Brazil, BHP tried to impose a steeper price increase on Chinese buyers.

The company asked for an extra US$7.50 to US$10 per tonne for its West Australian iron ore - equivalent to a price rise of as much as 115 per cent - arguing that the premium was justified by lower shipping costs.

The tactic might have worked a year or two ago. Compared with other steel-making countries, the Chinese market has historically been deeply fragmented, with dozens of competing producers. But, confronted with BHP's demands, China's big steel companies banded together and spoke back with one voice.

'We are entering a new paradigm in iron-ore pricing negotiations,' says Ben Lyons, metals and mining sector analyst at Macquarie in Sydney. 'The Chinese are getting more and more assertive.'

Even so, the steel companies' victory over BHP looks more like a well-fought rear-guard action than a triumphant advance. They will still have to swallow the benchmark 71.5 per cent price hike for their iron ore imports, and a 119 per cent increase in the price of coking coal; an equally important ingredient in steelmaking. Energy prices and shipping charges have appreciated sharply, too, further adding to production costs.

So far, steelmakers have been able to pass the price rises on to buyers, but that will become increasingly difficult. In response to soaring demand for steel over the last few years, businessmen rushed to invest in steel plants. Now, new steel works are popping up in municipalities all over the country, just as China's economic growth is moderating. Analysts fear a glut.

'This is the year Chinese steelmakers' margins are going to come off,' said Jonathan Anderson, managing director at UBS. Pointing to slowing growth in car demand, construction, and industrial production, he predicted that China's demand for steel would grow just 10 per cent this year, compared with an annual level of 25 per cent between 2001 and 2003.

Aware of the danger, Beijing tried to slam on the brakes last year. It vetoed some new projects and demanded stronger financing for those already approved, but with questionable effect. In the first two months of this year, China produced just over 50 million tonnes of crude steel, up a massive 23 per cent over the same period last year.

With dozens of new plants nearing completion, its annual crude steel production capacity would top 350 million tonnes by the end of this year, said Liu Jinghai, director of China research at consultancy World Steel Dynamics.

Meanwhile, real domestic demand for crude steel - eliminating double counting of refined products - will be only about 280 million tonnes, leaving China with massive overcapacity, said Mr Liu. 'China needs to restructure its steel industry,' he said.

With high raw material prices and fears of anti-dumping measures by other steel-making countries set to prevent the mainland from exporting the excess, the sector will need to eliminate 40 million to 45 million tonnes of productive capacity before it can regain its health. Beijing will have no option but to let hundreds of smaller producers close, including some brand-new plants that have never gone into production.