big burst to the top is just around the corner

GLOBAL spot prices for iron ore are set to reach an all-time average high this year.

The prices will beat the previous record set in 2008 during the last commodities boom, a global price provider says.

Market expectations are that the average annual spot market price this year will rise to $US153 to $US154 a tonne of iron ore fines with 62 per cent iron content, delivered to China, from $US146.70 in 2010, according to Steve Randall, managing director of The Steel Index, a London-based reference price supplier.

The expected 2011 average would exceed the average of just below $US150 a tonne in 2008, Mr Randall said.

While spot iron ore prices towered to their highest ever at more than $US200 a tonne in March 2008 during the commodities boom, the 2008 average was brought down by lower prices later that year after the global financial crisis hit.

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"The key factors for this year are higher steel output and steel prices," Mr Randall said. "Steel production in China will be stronger for the next few months. Steelmakers in the rest of the world are still recovering from the crisis -- they're not yet back to their 2007-8 levels. In the US mills are now putting up their steel prices like crazy."

Iron ore is the main ingredient in steelmaking.

According to the Brussels-based World Steel Association, global crude steel output rose 5.1 per cent in November to 114 million tonnes from the year before, but was still below historical levels, indicating further output recovery is on the way. Global steel demand is expected to improve by 5 per cent in 2011.

Iron ore supply had not yet responded to higher demand levels, which could put upward pressure on iron ore prices, Mr Randall said. "New iron production capacity will come on stream only at the end of 2011, in both Brazil and Australia," he said.

In addition, India's continued ban on iron ore exports from Karnataka state, designed to preserve supplies for domestic steelmakers, has also pressured supplies, according to the price provider. Brazil, Australia and India are the world's three biggest iron ore exporting nations.

Problems with heavy rain and flooding in parts of Australia -- said to be the worst in 20 years -- have had no direct effect on iron ore prices, Mr Randall said. The flooding is causing disruptions in Queensland, which principally is a producer of coal, not iron ore.

"However, (iron ore) prices are being affected by the sentiment. People believe the likelihood of more extreme weather is higher, with the possibility of more interruptions," he said.

Iron ore loading at a Rio Tinto port in Australia's Pilbara region was suspended for two days just before the end of last year due to a cyclone warning.

Spot iron prices rose US90c on Tuesday to $US171 a tonne, making for a $US6 increase in the past month, according to The Steel Index.

According to Pedro Galdi, Sao Paulo-based analyst with SLW Corretora, Australia's climatic problems may temporarily affect iron ore prices as they coincide with Brazil's rainy season.

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