The price of buildings, cars and machinery will increase sharply this year because the cost of steel is expected to rise by up to 40 per cent.

Rio Tinto, the world's second-largest mining company, said yesterday that it had agreed an 85 per cent increase in the price of its iron ore - the key raw material for making steel.

This comes on top of a tripling in the price of coking coal, another component in the steelmaking process.

Analysts expect steel companies to pass on these raw material increases to consumers in the form of higher prices. This year Daiwa Securities, the Japanese bank, said that steel would rise by 22 per cent, but analysts are upgrading their forecasts. Last month Nippon Steel agreed a 30 per cent price increase with Toyota, the automotive giant, and smaller buyers may face as much as a 40 per cent increase.

Rio Tinto agreed a 96.5 per cent increase for its “lump” iron ore from the Pilbara region of Australia and a 79.9 per cent increase for its “fine” ore. The deal is with Baosteel, China's largest producer, but will become Rio's de facto price for all other steelmakers.

This is a higher settlement than Vale, the Brazilian miner, achieved in February - 68 per cent - but Rio was able to push for a higher settlement because of the lower cost of shipping ore from Australia than Brazil.

The increase in price will raise Rio Tinto's underlying earnings by about $3.8billion. The company earned $7.4 billion last year, $4.6 billion of which came from its iron ore division.

BHP Billiton, the world's largest miner, is expected to conclude its pricing negotiations soon and they are likely to be in line with Rio's settlement.

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