We will all pay for the big iron ore prices won this week by BHP Billiton and Vale of Brazil, and so will the companies.

The 90%-100% price rises reported from contract deals in Asia and Europe will add to the pressures of big price rises for coking coal reported of 80% in some cases.

Already steel groups are saying the price rises will see price rises for steel products of 20%-30% worldwide, with rises towards the top of that range thanks to higher coal costs.

Cars, building, ships, iron and steel plants, oil rigs, gas plants, washing machines will all have to boost prices for a major raw material, at a time when demand for some of these products is low (cars), strong (LNG plants).

For BHP and Rio, the cost price rises could damage their ambitions to merge their WA iron ore operations.

European car companies criticised the price rises and “accused mining companies of unfair pricing practices following the introduction of a new system for valuing iron ore that will see the cost of the resource nearly double”.

“Eurofer, which represents European steel makers, has complained to the European Commission about possible pricing abuses, saying there were “strong indications of illicit coordination of price increases and pricing models and pressure on individual steel producers to accept these changes”.

The price rises will add to pressure on the European Commission and German (and Chinese) competition regulators to block the iron ore production joint venture proposed by BHP and Rio in the Pilbara.

The price rises will be inflationary, not dramatically so at first, but as the higher costs get embedded in the costs of more and more products, price pressures will grow.

The head of the world’s biggest steel group, Arcelor Mittal, told Bloomberg the ore price rises will add $US150 a tonne to the cost of steel from this quarter onwards. That would be an increase of more than 20% for hot rolled steel coils.

For Australia it is a double edged sword; the higher earnings from iron ore (and coal), we will get an enormous boost to our terms of trade and national income, but the cost of steel products will rise, as will in turn boost development costs of projects such as the Gorgon LNG project, the central Queensland coal seam gas into LNG projects, coal mines in Queensland and NSW, not to mention the iron ore expansions of BHP and Rio (and other projects) in WA.

Unlike the huge 80%-90% price rises won for the 2008-09 year in iron ore and coking coal, the latest rises will pitch into a market still subdued globally by the crunch and recession. The previous rises were tipped into a booming market that was suddenly crunched from June, 2008 onwards by the credit crisis and then the recession. That helped kill the inflationary impact.

This time around the price rises will force steel companies to eat as much of the price rises as possible because demand is still weak in economies in Europe, Japan and the US.

But in Asia, economies outside Japan are booming, especially China. And in Australia the resources sector, especially gas and coal and iron ore, are surging. Inflationary pressures are building up. Already Inpex has quietly delayed a final investment decision on its Ichthys LNG project in the Northern Territory.

And the pressures won’t just end with these price rises, as they would have under the old benchmark pricing system.

These new supply deals are quarterly and linked to the spot market: the spot price for iron ore topped $US153 a tonne this week, about 50% above the new price levels in the Vale and BHP settlements. BHP’s is more directly linked to the spot price than Vale’s deal. As well coking coal spot prices are trading more than $US40 a tonne above the BHP settlement of about $US200 a tonne.

The Financial Times reported that “The world’s top ore miners stand to profit hugely in the short term from the new price system. One executive estimated that the profits of the big three producers, Vale, Rio Tinto and BHP Billiton, would be boosted by at least $5 billion this year.”

But some analysts see demand easing towards the end of this year as China’s economy slows and the surge in output and demand from mills in Japan, Korea, Taiwan, Europe and the US caused by the care scrappage schemes and other stimulatory measures end.