India is keen to use more of its iron ore at home. In a bid to cut shipments to key buyer China and to ensure adequate supplies to domestic steel mills, India is planning to hike the export tax on iron ore.

Rising raw material costs have been taxing steel companies even as the recent apex court's ban on mining activities in the iron ore rich state of Karnataka has added to their woes. Karnataka accounts for almost 25% of the total domestic steel production in a year. The state has contributed nearly 20% to the annual iron ore output.

And, although India's iron ore production is substantially higher than the domestic need, much is exported to China but analysts say Chinese companies are worried about the falling supply of iron ore from India.

India recently raised export duty from 15% on lumps and 5% on fines to a uniform 20%. After the duty hike, iron ore exports declined by about 22% to 25.2 million tonnes in April-July, compared to the corresponding period last fiscal.

The Federation of the Indian Mineral Industries expects iron ore exports to fall by over 20% to 75 million tonnes in the current fiscal (2011-12) from 98 million tonnes in 2010-11.

India is the third largest iron ore supplier in the world. The country exports to various countries including China, Japan, Australia, South Korea and Singapore. In the first six months of 2011, data showed that around 42 million tonnes of iron ore was exported to China alone.

In September 2010, after Karnataka's ban and slow demand from China, iron ore exports posted their sharpest monthly fall in nearly two years. Exports dropped 47% from a year ago to 3.03 million tonnes.

"India's balance of trade with China was severely hit as exports of Indian iron ore to China fell. Moreover, exports during April-December 2010, fell 17.02% from a year ago to 64.4 million tonnes. Between the end of July 2010 to April 2011, China's spot price for imported iron ore fines gained 40%. India lost a huge export revenue,'' said Parthip Sachdeva, analyst with a broking firm here.

India usually exports around 100 million tonnes per year and China buys over 96 million tonnes, making India its third-biggest supplier. The trade is worth around $1.5 billion per month, Sachdeva added.

Duty hike

Given the severe shortage of iron ore at home, the Indian government is said to be deliberating on increasing the export duty of iron ore to 30%. Steel minister Beni Prasad Verma said if exports are curtailed, it would solve the problem of iron ore shortage in Karnataka and other states to a large extent.

In a letter to the Finance Minister Pranab Mukherjee, the minister has asked that the duty be raised by 10% to 30% to discourage exports.

"We want to get the increase in export duty on iron ore implemented immediately. I had written to the Finance Ministry at the beginning of the Karnataka crisis, The continuous exports of the raw material is a big cause of concern,'' the minister told a newswire agency.

In 2008-09, 212.96 million tonnes of iron ore was produced of which 105.86 million tonnes, which amounts to 49.7% was exported. In 2009-10, 218.64 million tonnes of ore was produced and 117.37 million tonnes, which amounts to 53.7% was exported, Verma said.

He said in 2010-11, the estimated production was 208.11 million tonnes of which 97.66 million tonnes, which amounts to 46.9% was marked for export.

The steel industry in India is a big domestic user of iron ore. Many steel companies have captive mines. India's steel production grew 7.4% during August 2011 and stood at 6.16 million tonnes in August as against 5.73 million tonnes in the corresponding previous year, according to data from the World Steel Association. Global steel production, on the other hand, increased by 9.8% during this period and world steel output grew to 124 million tonnes against 113 million tonnes of the previous year.

For the first eight months of 2011, India's steel output grew 5.3% to 47.95 million tonnes against 45.52 million tonnes in the corresponding period of last year, while global output in the first eight months of 2011 grew by 8.3% to 1.01 billion tonnes against 933 million tonnes in the corresponding period.

China, with a 13.8% growth in output at 58.72 million tonnes, was the world's largest producer of steel in August, followed by Japan at 8.9 million tonnes and the United States at 7.53 million tonnes.