Rio Tinto’s decision to hold out for price gains on iron ore sales to China has payed off, with a record average increase in price of 85 per cent finally agreed upon.

With June 30 looming and the prospect of ore being sold on the spot market at much higher prices, negotiations have resulted in a 96.5 per cent increase for lump iron ore and a 79.88 per cent increase for fines, equating to an 85 per cent price hike overall.

Despite the world’s largest iron producer, Brazil’s Vale, accepting price gains of 65 to 71 per cent in February, Rio and BHP elected to hold out for bigger increases.

The deal has vindicated Rio’s argument that the price for Australian ore should carry a freight premium, given the proximity of Australia’s Pilbara region to China, and the rising freight costs associated with importing ore from Brazil.

With the massive price rise expected to be followed by BHP and other Australian iron ore producers, the Australian iron ore industry is expected to enjoy a windfall of $5 billion extra profit in the coming year.