(Yicai Global) March 21 -- The cost of low-grade Australian iron ore has climbed after Chinese steel producers switched to buying the poorer quality commodity because of a downturn in domestic steel prices and shrinking profit margins.

Perth-based Fortescue Metals Group, which mines low- and medium-grade iron ore deposits, raised the price of two of its products this month by slashing the discount to 16 percent from 33 percent, online financial news outlet Jiemian reported.

China's steelmakers have seen their product prices slump since November, when the most they could earn was about CNY1,000 (USD149.20) a ton. The same figure for the first quarter has been about CNY200 to CNY500 a ton.

They tend to buy higher-grade, more-costly raw materials when they can turn a higher profit, said Wang Yangwen, a senior analyst at S&P Global Platts, a UK provider of energy and commodities information. But they also buy much cheaper lower-grade ore when profit margins contract, he added.

Chinese steel mills will be more sensitive to ore miner brands in the next few years, according to the London-based provider of benchmark price assessments in energy markets. That means producers will quickly change their choice of grades depending on profit fluctuations.

Large companies may take several months to carry out such adjustments, but small and mid-sized players, with production capacity of less than 10 million tons, can do it in just a week or two.

The growth of China's steelmakers is not expected to slow and their profit margins still have room to widen, boosting iron ore demand, Fortescue Metals Chief Executive Elizabeth Gaines said last month.