SINGAPORE - Steelmakers reeling from a two-thirds rise in iron ore prices this year should brace themselves for several more years of pain.

Analysts say it will take until 2010 or longer for new supply to provide relief to an iron ore market that is now operating at the limits of its capacity — bad news for the world’s steel mills, caught between higher costs and increased competition.

Brazil’s Vale set the benchmark for 2008-2009 contract prices this week with a rise of between 65 and 71 percent. Prices have risen more than fourfold over five years.

"We expect another increase in 2009 before prices level off in 2010 and they should maintain these elevated levels out towards 2015," said UBS metals strategist Robin Bhar.

As the commodities price boom got underway several years ago, miners who feared the rally wouldn’t last favored showering shareholders with cash over making new investments.

World steel production has jumped 60 percent to 1.34 billion tons since 2001; over the same period, No. 3 iron ore miner BHP Billiton has returned nearly $30 billion to its shareholders in capital management initiatives and dividends — more than double its capital spending in the period.

With the cash still flooding in and Chinese demand booming, the three big miners and a handful of up and comers are making big investments — but now face huge delays in securing the gargantuan trucks or massive draglines needed to pry ore.

"The problems have been bringing on sufficient supply to meet demand, and bringing it on quickly enough," says analyst Gayle Berry at Barclays Capital. She says the waiting time for core mining equipment has more than doubled in just a few years.

The shortage of manpower is equally vexing, even though high wages have attracted a fresh crop of geology students.

A Rio Tinto spokesman said Rio’s iron ore business had hired 1,000 people in each of the past two year.

"But there is still a shortage of specialist skills," he added.

Signs of greater supply are now appearing on the horizon. Rio Tinto spent $1.4 billion last year to nearly double annual capacity at its Dampier iron ore port in Australia to 140 million tons, adding 3-4 percent to world supply.

BHP Billiton this month earmarked $930 million to speed up plans to dig more iron ore mines, lay more railroad tracks and enlarge its own ports, and says it has around $85 billion in projects in its long term pipeline.

But analysts say all three big miners have been forced to divide their focus between operational growth and acquisitions.

Rio Tinto spent around $38 billion on Canadian aluminum maker Alcan last year; Vale hovered up Inco and has made a play for Xstrata, another aggressive player.

And now BHP Billiton has launched a $150-billion bid for Rio, potentially the world’s second-biggest corporate raid.

All that activity has also resulted in a more consolidated industry, giving miners economies of scale — but, argue some analysts, also distorting the market.

"The wave of consolidation has transformed the industry from a textbook case of perfect competition to one characterized by more monopoly pricing power," a UK-based mining analyst said on condition of anonymity.

"As the textbook predicts, investment and production is lower in an oligopolistic industry than would have been the case under a more competitive market structure, while prices and returns to shareholders are higher."

It’s steelmakers like Nippon Steel Corp, Japan’s JFE Holdings Inc and Arcelor Mittal that are paying the highest price as they struggle to pass on costs in an environment of increase competition from China. – Reuters

"I think the stronger for longer outlook on iron ore is still pretty valid," says Geoff Plummer, Chief Executive of Australian mill OneSteel Ltd, who said he would have been surprised at anything less than a 65 percent hike.

The high cost of entry to iron ore mining means there are few other companies waiting in the wings to ease the supply tightness.

Fortescue Metals Group Ltd is racing to initiate iron ore shipments exclusively to Chinese steel mills by May 2008, with initial production around 45 million tons.

Other prospectors, including Murchison Metals Ltd and Midwest Ltd are proposing digging the first mines in the Midwest region of Western Australia, where low-grade ores had been uneconomic to exploit.

But the question remains how they’ll get those supplies to market without sizeable new investment in the railway, port and related infrastructure that is already struggling to cope with surging exports of coal and other minerals.

"The development of processing infrastructure, rail links and port terminals for the bulk commodities tend to make for natural monopolies," said the UK analyst. "It is one reason why the bulk miners are now emerging as the dominant force." – Reuters