A worldwide iron ore supply deficit of between 20 million and 25 million tonnes is likely in 2008, Credit Suisse forecast in a report on Monday, on the back of high demand from steel mills.

Iron ore miners are earmarking billions of dollars to expand mines, build new ore freighters and automate operations to dig faster and deeper to satisfy steel mills hungry for more ore.

Credit Suisse also said it expects annual term iron ore prices to rise by 55 percent versus a consensus forecast of a 35 percent hike.

Iron ore prices are set annually by the big three mining companies, Vale, Rio Tinto Ltd. and BHP Billiton Ltd after closed negotiations with big steel producers in Europe, Japan and more recently China.

Demand for iron ore has taken off in recent years, led by rising steel production in China, now the world's top importer.

"Despite the expected slowdowns in the US and credit tightening in China, 2008 will look very similar to 2007," Credit Suisse said in a report.

It said 2007 was one of the tightest markets ever for iron ore, leaving some steel makers short of the raw material.

"We are estimating another deficit of about 20 million-25 million tonnes against seaborne trade of about 870 million tonnes," it said.

Spot prices have been quick to reflect tight supplies and are at a 66 percent premium to ore shipped from Brazil on a cost and freight basis, Credit Suisse said. -Reuters