Sept. 7 (Bloomberg) -- Merrill Lynch & Co., the third- largest securities firm, raised its price forecasts for iron ore and coking coal to records because of surging demand for the steelmaking raw materials from mills in China.

The price of iron ore may rise 30 percent next year, higher than the 8 percent gain the brokerage forecasted earlier, Merrill Lynch analysts led by Sydney-based Vicky Binns said in a Sept. 5 report. Coking coal will also rise 30 percent, they said.

Iron ore prices may stay at records for three more years because of the inability of Cia. Vale do Rio Doce, Rio Tinto Group and BHP Billiton Ltd. to expand output fast enough to meet rising demand, Merrill Lynch said. China overtook Japan as the largest buyer of iron ore in 2003 because of increased production of cars, buildings and appliances.

``Iron ore has the best fundamentals of any resource commodity over the next three years,'' the analysts said. ``China now consumes 45 percent of global seaborne iron ore, and we believe it will drive 80 percent of growth in iron ore demand in 2007.''

The price of Hamersley fines ore, a benchmark, rose 9.5 percent to a record $51.47 a ton this year. Prices are determined by the content of iron in the ore and differs for each mine. Reference prices are taken from fines ore as it represents 60 percent of the traded market.

Iron ore prices may rise to $66.40 a ton in 2008, and stay at $69.70 a ton in 2009 and 2010, Merrill Lynch said, assuming 63.5 percent iron content in the ore.

The price of coking coal could rise to $125 a ton next year, Merrill Lynch said.

Thermal Coal

Thermal coal prices could rise 17 percent, up from an earlier forecast of 8 percent, it said. Prices may rise to $65 a ton in the year starting April 1, 2008, compared with a previous forecast of $60 a ton, the report said.

Supplies of coal used for power generation have been constrained after China became a net coal importer for the first time in January, some Indonesian mines missed shipments because of rainfall and Australian miners were hamstrung by insufficient rail and port capacity.

``The main driver of further upgrades has been the China's withdrawal from the seaborne thermal coal market, as well as continued supply disruptions in Indonesia due to wet weather, as well as Australia's ongoing rail and port constraints,'' Merrill Lynch said. ``We do not expect substantial relief in thermal coal supply issues caused by Australian infrastructure constraints until at least 2010.''

To contact the reporter on this story: Tan Hwee Ann in Melbourne at hatan@bloomberg.netMichele Batchelor in Singapore at mbatchelor@bloomberg.net

Last Updated: September 7, 2007 00:12 EDT