* Australia ups price forecasts for iron ore, coal
* Says sees surprise surge in steel activity in China
* Iron ore forecast up 10 pct, coal 16 pct
By James Regan
SYDNEY, Oct 7 (Reuters) - Australia on Friday raised its 2016 average price forecasts for its two highest-grossing exports, iron ore and coal, citing a surprise upturn in demand from steelmakers in China.
In its latest quarterly outlook, Australia's Department of Industry, Innovation and Science boosted its forecast for iron ore by 10 percent to an average $48.50 a tonne this year, while metallurgical coal was increased 16 percent to $99.40 a tonne.
The rise reflects a recent surge in the prices of both commodities, with iron ore currently trading around $55 a tonne and metallurgical coal at $200 a tonne, underscoring an unforeseen resurgence in China's industrial sector, the main buyer of Australian commodities.
"Prices for most construction and steel making raw materials continued to grow in the last three months, despite expectations of decline, because of unexpectedly resilient demand from China's construction sector and unforeseen supply disruptions," Mark Cully, the Department's chief economist, said.
Less than a year after coal was declared in terminal decline as governments step up efforts to combat carbon dioxide emissions, coal markets have surged on factors including tigher regulations on local production in China.
Australia expects the average metallurgical coal price to rise in 2017 to $108 a tonne, but said iron ore prices were set to decline later in 2016. It forecast prices at an average 6 percent lower in 2017 at $45 a tonne, reflecting rising supply.
Australia's iron ore exports were also forecast to increase by 8 percent to 851 million tonnes in fiscal 2017, boosting export earnings by 12 percent to A$54 billion, up from the previous forecast of A$49 billion.
Two of Australia's three largest iron ore miners, BHP Billiton BHP.AX BLT.L and Fortescue Metals Group FMG.AX have targeted a combined record 440 million tonnes of exports. Rio Tinto (LON:RIO) RIO.AX RIO.AX is aiming to ship a further 330 million tonnes from neighbouring ports.