India's steel needs spell less iron ore for China

India's export taxes on iron ore and plans to ramp up supplies to domestic steel mills will cut shipments to key buyer China in the long term, and aid miners wrangling for a steep hike in term prices, if not scrap them.

The world's third biggest exporter of iron ore will use more at home, analysts say, stepping up pressure on China as it negotiates with key suppliers such as Vale, Rio Tinto and BHP Billiton, who are keen to boost term prices 70% or more.

India's share of iron ore imports by China, chiefly on the spot market, fell to 17% of a record 628 million tonnes in 2009, versus 20% in 2008, ceding ground to Australia and Brazil in a race to feed the world's largest steel producer.

"In the longer term we are going to slip down in China's iron ore market as steel demand is growing in India," said Rakesh Arora, an associate director with Macquarie Group in Mumbai.

"Indian iron ore exports to China could decline by 5 to 10% in the next 5 years. Naturally China will feel the pinch and that will sustain iron ore prices."

In January, India clung on to this No. 3 spot, sending 9.3 million tonnes to China, or an annual increase of 5.1%.

"Australia and Brazil are expanding capacity and will continue to increase their dominance," Arora added.

Indian trade officials agree the country's annual exports will not exceed the current figure of about 106 million tonnes, while industry exert Calum Baker, research manager for steel raw materials at CRU Analysis, said they would actually decline.

"I think we are probably approaching a point where Indian exports are peaking and I think they will fall away," Baker said recently, adding that he expected Indian iron ore to get priced out of the global market.

Iron ore prices in India climbed above USD 100 a tonne late last year to reach a little under USD 140 a tonne this year amid bullish forecasts for the rest of the year, which prompted the government in December to double its tax on iron ore lump exports to 10% and add a 5% levy on fines.

Global spot market prices for iron ore surged more than two-fold in the last year on strong demand from China and economic recovery in Europe and the United States. Iron ore prices remain near USD 130 a tonne.

As iron ore prices surge, the Indian government could move to rein in exports still further, one analyst said.

"Another duty (tax) hike is possible. They might try to do other things to restrain exports. I won't be surprised," said Pawan Burde, research head at PINC Research in Mumbai.