(Reuters) - The Supreme Court may decide as early as next week whether to lift a 6-1/2-month ban on iron ore exports from Karnataka, a ruling that could dampen a surge in spot prices since the start of the year.
Tight global supply of the raw material used to make steel has fueled a surge in spot prices to near record highs, a boon for miners and burden for steelmakers grappling with rising cost of iron ore that last year increased more than 40 percent.
Karnataka is the second biggest iron ore producer in India, the world's No. 3 supplier. The state, in a crackdown on illegal mining, has banned shipments since July 26 last year.
Around a quarter of India's annual exports of around 100 million tonnes comes from Karnataka and because of the ban India's iron ore exports fell for a sixth straight month in December.
India's top court is expected to make a decision on the ban in mid-February.
"The lifting of the ban will definitely lift exports and at some point will at least slow the rally that we have seen," said Christopher Ellis, index analyst at data provider Metal Bulletin.
A surge in key price indexes, based on spot prices and which global miners like Vale and Rio Tinto use in setting quarterly contracts, to record levels recently will lift contract prices to a record $165 per tonne in the second quarter, according to a Reuters poll of analysts.
But a recovery in world seaborne supply later in the year is expected to cut contract prices for the second half.
"However you look at it, the tightest market is probably behind us and you're going to definitely see an improvement in volume out of Brazil, Australia, and potentially out of India," said Macquarie commodity analyst Graeme Train.
"And that will put a little bit of pressure on spot prices."
Analysts predict global iron ore seaborne supply to increase by around 20 million tonnes this year, with the additional volume to come through from the second quarter.
TEDIOUS RULES
But even with more material out of Karnataka or India in general, may be looking at ways to reduce exports to meet domestic demand likely to grow bigger in the future with steel giants ArcelorMittal and POSCO looking to build plants in the country.
India last month cleared plans by POSCO, the world's No. 3 steelmaker, to build a $12 billion steel mill, the country's biggest foreign direct investment.
Indian Railways last month raised iron ore freight cost by 50 percent to take advantage of higher spot prices and there has been talk of India considering to increase iron ore export duty to 20 percent from 5-10 percent currently.
The top iron ore producing state Orissa, where the POSCO mill will be built, is also looking at implementing an export ban.
"I think we will see a slightly restrictive supply response out of India this year," said Mark Pervan, senior commodity analyst at Australia and New Zealand Bank.
A court ruling on Karnataka could influence the situation in Orissa which may have a weaker case to ban exports if Karnataka resumes shipments overseas.
Exporters in Karnataka are hoping to resume overseas sales in March although the state may start requiring a lot more paperwork as it weeds out illegal miners.
"The documentation process will be tedious and it will take time for people to get accustomed to it," said Dhruv Goel, managing partner at iron ore trader Steelmint in Orissa.
"It is in the interest of the major miners in the state to cooperate and make sure a similar situation does not recur - they have lost out massively, especially with prices hitting record highs," said Metal Bulletin's Ellis
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