It’s the “teach a man to fish” theory of steelmaking: Buy iron ore from someone else, and you have it for a day (actually, 365 days, since iron ore is sold in year-long contracts); buy your own mine, and you have iron ore for life.

China’s steelmakers are worried about the price of their biggest ingredient.

China’s growth is tied to the construction of new offices, apartment buildings and Olympic-commemorative sports complexes. And all of those new high-rises and architecturally avant-garde fitness centers pushing their way into the Beijing and Shanghai skylines need a lot of steel (so much that the government limits the amount that can be exported, flooding the domestic market to keep steel prices artificially low). And steel needs a lot of iron ore.

China has three major iron ore suppliers: Australia’s BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RTP) both raised their contract prices on China this year by as much as 97%. And right now the country’s steelmakers are engaged in a staring contest with the third, Brazil’s Vale (NYSE:RIO), waiting to see who’ll blink first

Vale, which only got a 71% increase in this year’s contract price, wants more money and canceled its shipments to the country until China coughs up the dough. But the Chinese steelmakers, many of which are still on the government’s short leash, aren’t budging on their contract prices, even if they are 11% lower than Vale charges its European customers.

In the meantime, China is shopping around for its own iron ore mines to solve the supply problem altogether. Jiangsu Shagang Group, one of China’s largest state-controlled steel companies, just bought a 45% stake in Australia’s Grange Resources (Australia:GRR). (Anybody else notice that China is slowly buying all of Australia? Shouldn’t this alarm someone? Like the prime minister or whoever runs the country’s military?)

Shagang already controls Australian Bulk Minerals, which operates a Tasmania iron ore mine. And it plans to combine the two companies to create a billion-dollar (I’m not being hyperbolic; the new company will be worth about 1 billion Australian dollars) iron ore miner.

If China’s steelmakers continue on their current plans, Vale may find itself not as vital as it once thought. Perhaps 71% is a good enough raise for 2008. After all, with only three months left in this year’s contract, negotiations for next year could make up for all of the lost profits in this year’s contract.

Source: Vale (RIO) cuts off iron ore… and China goes shopping