Spot iron ore prices hit a fresh 18-month high yesterday as Chinese steelmakers returned to the market after their new year holidays, buying heavily to replenish inventories.

The sustained surge in spot iron ore costs points to a record rise in the annual price contracts being negotiated between global miners Vale, Rio Tinto and BHP Billiton and steelmakers in China, Japan and Europe.

Australian benchmark iron ore – 62 per cent iron content – surged yesterday to $133.1 a tonne, according to swaps cleared at the Singapore Exchange.

Spot prices include the cost of shipping to China. Excluding freight costs from Australia to China of about $10 a tonne, current spot prices are more than double the $60-a-tonne level at which the annual contracts were settled in 2009.

This strength bodes well for the miners as they seek record prices for the 2010-11 contracts that start on April 1.

The miners, led by BHP Billiton and Vale, have indicated that they want to shift the annual contract prices closer to the spot market, a move opposed by the steel industry.