Steel mills are set to pay record prices for iron ore next quarter, as resurgent global demand butts up against limited supply.

The cost of iron ore, used to make steel, is critical to the global economy as it filters into steel prices and, ultimately, into the cost of everyday goods. The sharp rise in costs – up about 23-25 per cent from the first quarter, according to analyst estimates – will add to concerns about inflation as oil and food prices are also rising rapidly.

Iron ore prices are important to the profitability of two of the world’s largest heavy industries, the mining and steelmaking sectors. In the past three weeks, the three top miners of the commodity, BHP Billiton, Vale and Rio Tinto, have each reported record profits for 2010 driven in large part by the strength of iron ore prices.