Soaring Chinese demand has fuelled a massive rise in the iron ore prices agreed in key negotiations between two of the world's largest miners and Japanese steelmakers.

Rio Tinto, the world's second-largest iron ore exporter, said in a statement to the Australian Stock Exchange that it would increase the price of iron ore sold to the Japanese steelmaker Nippon Steel by a record 71.5 per cent.

The price of fine ore, which accounts for around 60 per cent of world iron ore trade, would increase to 61.72 cents per dry metric ton unit starting April 1, from 35.99 cents, the company said.

"This price increase reflects unprecedented demand for our products, driven by the continuing growth in steel consumption, particularly in China," Sam Walsh, chief executive of Rio Tinto's iron ore unit, said.

The news comes a day after Brazilian mining giant Companhia Vale do Rio Doce agreed a 72 per cent increase in its deal to supply Nippon Steel and JFE.

The iron ore prices agreed by Japanese steelmakers are widely seen as a bellwether for the global market.

According to the Austrian-based Macquarie Bank, each $1 a ton increase in iron ore prices adds $80 million to Rio Tinto's profit. Vale do Rio Doce, BHP Billiton and Rio Tinto control more than 75 per cent of global iron ore exports.

Tony Trahar, the chief executive of Anglo American, the London-listed South African miner, today credited "the ongoing industrialisation of China, which fed through into strong demand for many of our commodities" for a record 58.7 per cent hike in earnings to $2.7 billion last year.

He added that American and Japanese economic growth could fuel further price rises this year.

Steelmakers are likely to suffer in the wake of the price increases. "The new price is very high. Chinese steel firms could try to buy more domestic iron ore, but the problem is that the grades are generally lower," Xu Aihua, of Chinese metal consultancy Antaike, told Reuters.

"The ability of steel producers to pass on price rises is crucial to the outlook for iron ore pricing beyond 2005 - 2006," Morgan Stanley said in a recent report.

"The end of the current cycle is most likely to be driven by over-production of steel in China, which will lead to a fall in steel prices," the bank added.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive