Iron ore, along with coking coal, is one of the raw materials used in the process to make steel.

Steel needs equal parts of iron ore and coking coal and as we all now know, China has limited amounts of quality coal and iron ore and became increasing reliant on imports to meet their steel production need. Due to huge demand for steel between the end of 2002 and 2008, commodity prices racked up huge rises: coking (steel-making) coal by 520 per cent and iron ore by 420 per cent.

The commodities boom has been mainly driven by China’s – and to a lesser extent, India’s – need for raw materials and power. As the massive Chinese industrial expansion hoovers up Australian commodities as fast as they can be mined or pumped, the commodity price strength has helped push many miners’ profits and share prices to record levels.

Each year the world’s three biggest iron ore producers, Australia’s BHP and Rio Tinto, and Brazil’s Companhia Vale do Rio Doce (CVRD) sit down separately with steelmakers around the globe (led by Chinese and Japanese makers) to negotiate prices known as the annual contract price. Typically these negotiations take place between December and March, depending on commercial climate and independent stakeholder’s acquiescence to the pricing outcome.