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China and iron ore keep market guessing

This week's jump in iron ore prices to 15-month highs delighted investors and politicians hoping that mining revenue would pour in again, but analysts are nervous about Chinese volatility.

The rise in the benchmark iron ore price to $US158.50 ($A151.44) is well ahead of projections and has surprised the market as much as last September's plunge to $US86 ($A82.17) a tonne leading to calls that the boom in iron ore at least was over.

Where last year Chinese steel mills caught Australia by surprise and ran down inventories in a slowing economy, now they are restocking to ensure supplies as economic growth ramps up.

Some analysts have started upgrading their ratings of iron ore miners but most do not believe prices will stay this high for long, which majors Rio Tinto and Fortescue said this week.

Iron ore is Australia's biggest export earner, generating $63 billion last year but the Bureau of Resources and Energy Economics (BREE) downgraded that to a still healthy $53.15 billion for 2013 when prices fell.

Commsec's chief economist Craig James said the pricing volatility of recent months showed how hard a time analysts were having predicting what an economy of 1.3 billion people would do.

"China is experiencing the biggest industrialisation in world history, no other country of this sort of magnitude has gone down this path," he told AAP.

"It is hard to estimate what demand is going to be for China for resources over a long period of time and this is going to be a major source of uncertainty for analysts across the world, not just for iron ore but all sorts of resources.

"You have 1.3 billion people with income levels rising, buying more goods and huge demand for goods and underlying resources ... there's going to be ebbs and flows but for Australian resource producers it's very much good news.

"That means better returns for miners, higher profits and has got to be encouraging for government."

At current $US150 ($A143.31) a tonne-plus levels, iron ore production is highly profitable but Mr James said he expected it to ease to a still-attractive $US120.

Elsewhere, Patersons Securities has increased its forecast for 2013 iron ore prices to $US128 ($A122.29) a tonne from $US116 and $US117 in 2014 from $US112.

Credit Suisse is bearish, describing the current rise as a "last run up" before new supply from majors such as BHP Billiton, Rio Tinto and Fortescue leads to an easing back to $US125 ($A119.43) this year and an average $US90 ($A85.99) in 2015.

Higher prices in 2013 have raised hopes the federal government will finally receive revenue from the controversial mining tax and firmer tax revenue generally, but Mr James said it would likely take at least another 12 months to wipe out the federal budget deficit.

Iron ore prices were less important to the Australian economy than market sentiment generally, he said, which seemed positive about 2013 as the Chinese economy picked up and there was a housing-led recovery in the US.

"I would think there has been a little bit of a knee-jerk reaction of mothballing plants in the last year to changes in (commodity) prices," Mr James said.

The majors have cut costs and cancelled projects - Fortescue especially - and Mr James said he thought there was too much focus on the short term rather than longer term.