The position of global mining groups in their annual iron ore negotiations with steelmakers has been strengthened after spot prices reached their highest level of the year yesterday.

Strong demand in China and supply disruptions in India are behind the move higher.

The price surge to $106.9 a tonne – including freight – puts current spot prices more than 47 per cent above the level at which the 2009-10 annual contracts were settled. Spot iron ore prices hit a low of $59.1 a tonne in late March.

“Chinese buyers are coming to the market to secure supplies, as is everyone else,” said Richard Herselman at brokerage London Dry Bulk. “The market is tightening and it is likely to remain tight in early 2010.”

The spot price increase comes as Vale of Brazil and Rio Tinto and BHP Billiton discuss the prices for the so-called benchmark contracts for 2010-11 with international steelmaking companies.

Traditionally, annual contracts are settled below spot prices. Last year's benchmark contract for iron ore was $60 a tonne, excluding freight costs.

Investment banks have this week increased their forecasts for 2010-11 contracts, saying that annual iron ore prices could rise up to 30 per cent. Previously they were expecting unchanged prices or a 10 per cent increase.

Macquarie, the Australian bank, said prices would rise 30 per cent and anticipated that spot prices would also “move higher in the coming months”.

Jim Lennon, an analyst at Macquarie, said: “The short-term risks to iron ore pricing are still to the upside as non-Chinese demand recovers strongly . . . and the main suppliers pull tonnes out of the Chinese market back into their traditional markets.”

Mr Lennon, a respected analyst, said that Chinese domestic high-cost iron ore production would need to increase to balance the market, but warned that spot prices would have to rise further, perhaps climbing above $120-$130 a tonne, to induce shut down mines to restart.

JPMorgan said this week it expected annual contract prices to rise by 20 per cent in 2010-11 and by 30 per cent and 10 per cent in the following years.

Rodolfo De Angele, JPMorgan mining analyst in São Paulo, said that “while Chinese production continued to rise and was now above pre-crisis levels”, steel production outside China was now also on the increase. “More than half of blast furnaces that were shut down during the crisis outside of China have already been reheated and are therefore demanding more iron ore,” he said.