Stand by for the iron and steel bubble, one which will end in tears like the US property bubble, the leveraged credit bubble and of course the dot com bubble.

Australia investors in iron ore exporters like BHP Billiton and Rio Tinto might be leaping around in joyous expectation of a shower of loot from a 65% rise in contract prices from major Asian buyers. And coking coal exporters and their owners are no doubt feeling the same, as are exporters of thermal coal: China’s terrible winter weather has changed the dynamics of the world coal trade, forcing prices to silly levels.

We have already seen the mad bubble-like scramble for any piece of dirt in Western Australia that is vaguely hematite-red, the main Australian type of iron ore. The rise of a host of tiddlers, led by the likes of Fortescue Metals, now rushing towards maturity, has sparked a flood of imitators. The 65% rise in prices will add to that pressure.

But this will all come back to haunt us: every mining boom in Australia, gold, nickel, copper and oil, has ended in tears and there is no reason to think otherwise of the iron bubble now well underway.

The higher iron ore prices and impending price rises for all forms of coal, but especially metallurgical or coking coal, will come at a cost: a steel bubble with higher prices for raw steel and products made from steel imported into Australia (stainless steel and tinplate, as well as structural products) and higher prices for steel made for the local market.

Steel is an essential ingredient in so many products, even in these times of the services-based cyber economy: all forms of building, cars, trucks, roads, every sort of infrastructure project needs steel in its many and varied forms. The sorts of price rises now being mentioned in Asia of up to 30% will add to the inflationary pressures in Australia at the very time the Reserve Bank is concerned those same pressures are going to cause problems.

Even though it will benefit the export economy, the higher prices for iron ore and coal will add to demand pressures in Australia, while the rising cost of steel products will add to the inflationary pressures: the veritable two edged sword.

Australian steel exporters, BlueScope and OneSteel stand to make a lot of money following the rising prices in export markets, while keeping them low in Australia to fight off imports, now the only source of competition for our steel oligopoly after the third steel group, Smorgon, was taken over and dismembered by BlueScope and OneSteel last year, with official approval.

But the prices of local products will rise to world levels because Bluescope and OneSteel have to pay world prices for iron ore and coking coal: OneSteel has its own iron ore, BlueScope has none. It will be only a matter of time before BlueScope leads the chorus of complaints about the impact of rising raw material prices: it did it in 2006.

Resource giants, like BHP and Rio, know that while their iron ore exports will do well and can be easily increased, there’s no way they can lift exports of coal to take advantage of record prices in Asia for coking and steaming coal.

There’s now a shortage of coking coal (and metallurgical coke), because of the floods in Queensland and the continuing port congestion in NSW and Queensland ports. China’s winter storms have seen exports of coking coal to Japan cut off as all coal supplies are redirected to power stations in China.

Australian coal exporters are not going to be able to take advantage of the record prices: existing tonnages will be repriced higher in the next couple of months, but the spot market is where the action is happening and it’s the Americans, Canadians and anyone else with surplus coal who are getting prices that are reported to be up to $US350 a tonne, three times the current price for high quality metallurgical coal.

Japanese steel mills last week reportedly contracted to buy 1 million tonnes of hard US coking coal for $US350 a tonne for delivery next month on the spot market: a sign of just how potentially dangerous the coking coal shortage is at the moment. But more worrying for Australia is the boost to steel prices now being reported out of Asia.

The price rises – of around 30% for Japanese steelmakers, will force carmakers, shipbuilders and other steel consumers to lift prices for their products or suffer lower profit margins.

Chinese media reports say steel mills are warning of higher prices to pay for the 65% rise in iron ore costs and the impending lift in coal prices. China won’t be exporting any coal for at least a month, possibly two as stocks at power stations are rebuilt after being seriously run down in the storms last month and earlier this month.

That means the coking coal shortage will continue for some time yet and prices will go mad.