Iron ore rally may resume with India's tax hike

India's move to raise iron ore export taxes to 20 percent will send a shockwave through the $100-billion seaborne market, and fuel another surge in spot prices to record levels as top buyer China rushes to book cargoes before the hike takes effect in April.
The fourfold jump in duty on iron ore fines -- sandy material that typically contains 55 to 65 percent iron -- will hit Chinese buyers, the main market for India's iron ore exports, particularly hard, and drive up prices from the top two suppliers, Australia and Brazil.
"If the Chinese start to panic and come back to the market, it could cause an issue," said Michael Gaylard, strategy director at Freight Investor Services in Shanghai.
"It could cause a further tightening in supply and a reversal of the current price downtrend."
Iron ore spot prices surged to record highs near $200 a tonne in mid-February as tight supplies from India, the world's No. 3 exporter of the steelmaking material, combined with seasonal buying by Chinese steel mills which are building inventory in anticipation of a pickup in demand.
But with real demand still wobbly, Chinese steel futures last week dropped from record levels, knocking down spot iron ore prices as Chinese purchases slowed.
India on Monday hiked the export duty on iron ore fines to 20 percent from 5 percent in a bid to conserve the raw material for its growing steel sector.
The government also raised the export tariff on iron ore lumps to 20 percent from 15 percent. The new rates take effect on April 1.
India last raised the export tax on iron ore lumps in April 2010 to 15 percent from 10 percent, after slapping a 5 percent export duty on iron ore fines in December 2009.
"This would mean 1,000 rupees extra cost for exporters, which could pinch shipments," said Dhruv Goel, managing partner at iron ore trader Steelmint in Orissa.

SURGING DEMAND
India's surging demand for iron ore, with low-quality grades making up about 70 percent of last year's output of 222 million tonnes, has driven miners to invest in pelletizing plants so as to be able to use the iron ore fines.
There are now very few pellet plants in India, but many more are expected to be built with steel giants ArcelorMittal and POSCO looking to expand in the country.
Pellets, made of lower grade powdery iron ore fines once thrown away, but now melted down to make higher grade nodules, are ideal for feeding blast furnaces in steel mills.
The world's largest fifth largest crude steel producer, India is aiming to lift output to 120 million tonnes by the end of 2012 from nearly 70 million tonnes in 2010.
A ban on exports from India's southern Karnataka state since July had already caused iron ore shipments to fall for a sixth straight month in December.
India's top iron ore producing state, Orissa, and another exporting state, Chhattisgarh, are also looking at banning exports.
The higher tax rates "will increase the floor price for Indian prices and if Indian prices increase then that will push prices to China higher," said Henry Liu, regional head of commodity research at Mirae Asset Securities in Hong Kong.
But India's move may be aimed more at curbing illegal mining.
"If they are trying to stop illegal mining and make it much more costly to move that product, it's probably going to help to constrict supply and therefore get more of a handle on that fines market and some of the illegal trading that's going on in India," said FIS' Gaylard.
But the move means even higher costs for Chinese steel mills already reeling from a more than 40 percent jump in iron ore prices last year as the industry shifted to a more volatile quarterly pricing system from a decades-old annual scheme.
"Steel mills can't take more costlier raw materials at the moment as steel prices were heading downward recently on weak demand," said an iron ore official at a mid-sized Chinese steel mill with annual crude steel capacity of around 5 million tonnes.
But traders say India's move has yet to impact spot iron ore prices on Monday as players assess the impact of the policy move and with Chinese mills also likely to scour the market for other potential suppliers.
After Australia, Brazil and India, the next three biggest iron ore suppliers to China last year were South Africa, Iran and Ukraine, with Iran's exports surging the most at more than 100 percent.