Calcutta, Feb. 18: Steel prices are expected to leap by $100 to $125 a tonne by April — or Rs 4,000 to Rs 5,000 per tonne in the domestic market — as global iron ore producers have started aggressively negotiating new iron ore contracts.

Japanese steel maker JFE Holdings Inc, Nippon Steel and Korea’s Posco today agreed to pay Cia Vale do Rio Doce of Brazil — the world’s largest iron ore exporter — 65 per cent more for iron ore in 2008-09, setting a benchmark for the rest of the world, including India.

NMDC Ltd, India’s largest iron ore producer, said it would follow its global peers.

“We will raise prices from April 1. It won’t be less than 65 per cent,” Rana Som, chairman and managing director of NMDC, told The Telegraph.

There is a possibility that the rise in iron ore prices may be steeper. Australia’s Rio Tinto and BHP Billiton — the world’s largest mining company — are negotiating for bigger price increases with China, which is the largest steel producer in the world.

Domestic steel players such as Ispat, Essar and the Jindals — who buy ore and coking coal from the open market on a spot basis and on long-term contracts from NMDC — said they would be left with no choice but to raise steel prices.

“In the case of iron ore, there would be an effective increase of $80 per tonne of steel making. Add to this the potential rise in coking coal prices, and the rising shipping and rail freight costs. Companies will bleed if they don’t raise prices by $100 to $125 per tonne,” a steel company executive said.

The price of hot rolled coil is $800 or Rs 32,000 a tonne.

Tata Steel and SAIL — which have their own iron ore mines and do not need to import the key raw material — have been spared the rise in costs. All other integrated steel players say their costs have risen by Rs 7,000, or $175, a tonne of steel since October.

“Our costs have risen by Rs 7,000 a tonne since October. But we were only able to raise steel prices by Rs 2,500 a tonne this month,” said an official with a private steel maker.

The hardening of commodity prices around the world spells bad news for the Manmohan Singh government, which has articulated its determination to battle inflation as it heads for the Lok Sabha elections next year.

Last week, steel minister Ram Vilas Paswan persuaded steel firms to roll back prices by Rs 500 a tonne. The steel companies tried to posit their argument that their costs had risen by Rs 7,000 a tonne but Paswan did not relent.

The spiralling costs of raw materials have eroded the profits of steel companies in the third quarter.

Steel companies, which buy their iron ore from NMDC, have demanded that the state-owned company reduce iron ore prices if the government is really determined to put a lid on steel prices.

Industry observers say the government will have to wrestle with a situation where the costs of infrastructure projects will shoot because of rising steel prices — mirroring the situation where global crude prices peaked last year.