China’s attempts to try and crack the iron ore producers and force a sharp fall in the cost of ore from Australia and Brazil is being undermined by soaring world prices.

The stance it has taken over the Stern Hu and Rio Tinto cases, with claims of espionage and acting contrary to China’s interests, is being left behind by the booming spot price for ore, which topped $US90 a tonne and is closing on $US100 a tonne, according to London and Asian trading groups.

At that price, which includes freight and insurance, the cost of iron ore shipped from Australia is around $US80 a tonne, compared with the new average price for ore shipped by BHP and Rio to Japan, South Korean and Taiwanese mills of around $US74 a tonne (including freight).

Spot ore prices in China rose this week to $US93 a tonne — including freight — and industry observers said the market could hit a year high of $US100 or more a tonne in the next few months, such as been the rise in demand. Three weeks ago it was around $US78.50 a tonne.

The surge is a remarkable, coming from an April low of $US58 a tonne, and has seen some analysts forecast a rise in 2010 ore prices from the current levels in Japan and Europe, which would justify the hardline stance Rio and BHP have taken in their dealings with the Chinese buyers.

This price is also well above the prices that Vale of Brazil has rolled over contracts with mills in Europe.

It leaves the Chinese steel industry and its aggressively Government-supported industry group CISA (The Chinese Iron and Steel Association), increasingly isolated in their demand for a price cut from Australia of around 45 per cent (the average price cut fro Japanese mills was 37 per cent). Reports persist that more Chinese mills are signing up at an interim price cut of 33 per cent, which will probably be rolled over at the end of September into a new contract.

But will it last?

BHP, Rio and Vale have been selling uncommitted iron ore into the spot market all year and prices have started rising quickly in the last six weeks. But London shipping reports persist that the price rise is being driven by a fall in Australian spot sales in recent weeks, with a rise in sales out of Brazil’s Vale: daily freight rates have fallen in the past couple of weeks as more ships have entered the trade looking for business.

BHP said in the annual production report on Wednesday that while China had almost completed a build-up in metals and minerals such as iron ore, “restocking” was evident in the US, Europe and Japan. The miner said its ore output fell 10 per cent in the June quarter, Rio Tinto did a bit better, lifting its production 8 per cent in the second quarter.

Figures out this week showed that global crude steel production is recovering slowly but surely from the lows at the start of 2009.

Crude steel output fell by an annual 16 per cent year-on-year to 99.8 million tonnes in June. The World Steel Association said that was up from the 95.6 million tonnes produced in May. That was down more than 21 per cent from May 2008. (The association accounts for around 85 per cent of all global steel production).

China’s crude steel production for June 2009 of 45.39 million tonnes was 6 per cent higher than in June 2008, although elsewhere, output was weaker.

Over the first half of 2009, global crude steel output fell 21.3 per cent to 549 million tonnes, with China’s output heading for an annual rise of around 10 per cent, which would take output to around 550 million tonnes.

China’s crude steel production rose 1.2 per cent to 266.6 million tonnes in the first half of this year: output in the June quarter jumped sharply from the first.

China’s huge spending program is driving investment and demand for steel. Car sales are up nearly 50 per cent in June and May, with locally made car production rising 38 per cent from a year ago.

That in turn is leading to higher output for Chinese iron ore and higher demand for imports, which have fallen to around 53 million tonnes in June from May’s 57 million tonnes. China’s monthly iron ore output jumped nearly 27 per cent in June to 83.3 million tonnes.

And what about Australia? We produced 367,000 tonnes of crude steel in June from 318,000 tonnes in May, down sharply from the 659,000 tonnes in June 2008. Our crude steel output this year has risen from the low 277,000 tonnes in February. It has been enough to encourage BlueScope Steel to start bringing its recently reconditioned Number 5 blast furnace (the largest in Australia) back on line from next month. That had been delayed two months while steel demand slowly recovered.