Higher prices of key inputs such as iron ore and coking coal will force up steel prices in the coming year, but steelmakers may have difficulty passing on the full burden of the increases.

Robust demand from the automotive and machinery sectors will help producers pass on the increased costs, but with construction still lagging behind and concerns that China may further tighten its monetarypolicy amid concern over rising inflation, some steelmakers may find it hard to support higher prices to consumers throughout the entire year.

'Real demand continues to grow but at a slow pace. Due to the uncertainty over the 2011 economic picture, apparent market conditions are tough, which makes it a challenge to raise prices despite higher costs running through the business,' said Aditya Mittal, chief financial officer of ArcelorMittal, earlier this month.

After idling capacity in the third quarter and yet more in the fourth, the world's largest steelmaker has been operating only 15 of its 25 European furnaces from December.

ArcelorMittal forecasts global steel demand to rise 6% year-on-year in 2011, compared with an expected 10% rise in 2010.

Steel prices have ticked higher in recent weeks, helped by customers buying ahead of an expected price rise in the first months of next year.

U.K.-based consultancy MEPS International Ltd. said end-user demand for steel has improved slightly, but it's still not very strong.

'Prices will rise,' said MEPS analyst Kaye Ayub. 'Iron ore prices are set to rise in the first quarter 2011 and scrap prices are up.' In addition, she says inventories are low in developed markets so some restocking is expected.

Credit Suisse estimates that spot iron ore prices for import to China will average $149.91 a metric ton during the first quarter of 2011, up 8% from the $138.38/ton average in the fourth quarter of 2010.

'While mills can easily pass through higher input costs when end demand is strong, unfortunately the current environment is less supportive,' said analyst Andrew Snowdowne in a UBS report.

'A raw material cost push should support higher steel prices into 2011,' Mr. Snowdowne said. 'However, we believe this rally is likely to be short lived. We expect that by the second quarter 2011, steel prices will peak at a level that will allow steel mills in 2011 to only generate a 'fair' profit margin.'

Goldman Sachs too expects the cost push to fade later in the year.

'We continue to believe that absent any meaningful change in demand, aside from seasonal uptick in 1H-2011, the cost-push price increases may taper off as scrap moves down which is typical in spring months,' Goldman Sachs said in a report.

Not all steel companies are gloomy. German steelmaker ThyssenKrupp AG said it's 'cautiously optimistic' about 2011 demand.

'High quality steel will see stronger growth than commodity steel, which is predominantly used in the construction sector,' where demand remains muted, said Chief Executive Ekkehard Schulz.

U.S. steelmaker Nucor Corp. said this month that in the last month it has been able to raise steel prices and is also hopeful for a better first quarter in terms of higher prices and volumes of steel sold.

Steel mills are still grappling with the change in iron ore pricing in April from a decades-old annual benchmark system to one based on spot prices and reviewed every three months. Steel companies, however, want to return to an annual pricing mechanism.

'I stronglyadvocate that the mining industry reflects on their short-term pricing policy and develops an option for us to buy a part of our volumes at annual prices,' Michael Pfitzner, head of marketing and commercial coordination at ArcelorMittal, said. Iron ore miners, however, say they intend to stick to the new spot-based system.

Iron-ore prices should rise slightly in the first quarter 2011 and there should be some steel restocking pushing steel prices up, said Antonio Marcegaglia, chief executive of Italian steel processor Marcegaglia. He forecasts iron ore prices to stabilize later in the year and for there to be less speculative restocking.

But he said iron ore prices won't plummet, and China domestic steel consumption will grow albeit at a slower pace than the huge growth seen in the 2002-2008 period.

Chinese steel analyst Wu Wenzhang of SteelHome said he expects China's crude steel demand to rise 8% in 2011, or 50 million tons, to 650 million tons. He forecasts crude steel output in China, the biggest steelmaker, to rise 4.8%, or 30 million tons, to 660 million tons, while capacity will stand at 720 million tons by the end of 2010.