Javier Blas & Rebecca Bream Baosteel agrees to pay a record price increase to Rio Tinto for delivery of iron ore next year. Baosteel, China's leading steelmaker, agreed on Monday to the largest ever annual increase in iron ore prices with Rio Tinto, the Anglo-Australian miner, in a move that is likely to reinforce fears about global inflation. Rio Tinto said in a statement that Baosteel had agreed to pay up to 96.5 per cent more for its 2008-09 iron ore supplies under annual contracts. The increase is far above the previous record of 71.5 per cent rise agreed in 2005, and the 9.5 per cent increase agreed last year. Sam Walsh, chief executive of Rio Tinto's Iron Ore Group, said that the "agreement reflects the continuing very strong demand" for iron ore products. Rio's new iron ore prices are, depending on the quality of the ore, between 79.88 and 96.5 per cent above the 2007-08 level. The steelmaking industry has so far been able to pass a large share of its input cost on to its customers, with steel prices rising sharply in the last year, analysts said. BHP Billiton has yet to announce any settlements for the 2008-09 annual contracts, while earlier this year Brazil's Vale obtained increases of between 65 per cent and 71 per cent. The latest deal follows a Financial Times report earlier on Monday that Rio Tinto and BHP had told their Chinese customers to accept the largest ever increase in iron ore prices or risk the interruption of supplies from Australia. The two miners warned their Chinese clients that some annual contracts were due to expire next Monday and they would cease supply under the old terms. They have told them the ore would instead be sold into the spot market, where prices are higher. The bold step indicated that the heated annual price negotiations, already well beyond their traditional conclusion date, were set to move into a hostile phase. The agreement on Monday prevent the outbreak of hostilities, analysts said. Analysts said most of Rio's iron ore contracts would expire on June 30. However, some BHP contracts do not expire until September, leaving the latter time to negotiate and allowing Rio to take the lead in the discussions. Macquarie, the Australian bank, said Rio was committed to securing a price rice in excess of the 85-95 per cent the market is expecting. "That stance suggests investors should be prepared for an extended and potentially hostile conclusion to the negotiations," it said in a report. Rio and BHP are demanding a larger price increase than Brazil's Vale because their proximity to China reduces shipping costs. Traders said that freight costs from Australia to China tumbled last week by 37 per cent as at least one of the mining companies stopped booking some vessels for July to ship under the old contracts. That move signalled their intention to move shipments into the spot market if the negotiations failed. Although China has record high iron ore inventories, it is dependent on imports. Morgan Stanley said in a report on the ore market was it was under "unprecedented" pricing developments and "remains very tight and in significant deficit".