India's iron ore exports, which fell for the first time in a decade last year, could halve over the next five years as the country feeds the expansion of its steel industry.
Lower shipments from the world's number three exporter should help bolster prices that have already more than trebled from late 2008, as massive increases in global supply are only expected to come through by 2015 and demand from top consumer China rises.
"Indian exports are in a structural decline as resource nationalism becomes a bigger driver behind policy. The policy is definitely not encouraging exports," said Graeme Train, commodity analyst at Macquarie in Shanghai.
In a bid to curb overseas sales, India has raised freight rates and quadrupled export taxes on iron ore fines, the sandy material that typically contains 55 to 65 per cent iron and which comprises around 70 per cent of its annual output of about 200 million tonnes.
Iron ore exports from India fell 17 per cent to 97.6 million tonnes in the year to March, largely due to a ban on shipments from the key producing state of Karnataka.
Analysts in a Reuters poll forecast another drop to eight-year lows this year on increased costs and a delay in resumption of shipments from Karnataka, the source of around a quarter of India's exports.
Tight Indian supplies and booming Chinese demand lifted spot iron ore prices to record highs above $190 (U.S.) a tonne in mid-February. They are currently trading near $176.
The world's fifth-largest steel producer, India is aiming to lift output to 120 million tonnes by the end of 2012 from nearly 67 million tonnes in 2010, as the likes of steel giants ArcelorMittal and POSCO expand their reach into Asia's third-largest economy.
India is looking at 8.2 per cent growth this fiscal year, after expanding 8.5 per cent last year, underscoring the need to boost domestic steel output and consumption of iron ore.
With the expansion in its steel sector, the country's iron ore exports are forecast to fall to roughly half of the 97.6 million tonnes shipped in the last fiscal year by the year to March 2016, said Gunmeet Singh, analyst for CRU in Mumbai.
India's traditional steel blast furnaces can use only iron ore lumps, but there is a growing move among steelmakers to invest in more pelletizing and sintering plants that can take the iron ore fines now mostly exported to China.
Mr. Singh estimates that the country's pelletizing capacity will triple to 90 million tonnes in five years and its sintering capacity will increase 55 to 60 per cent from 53 million tonnes.
"In many ways the efforts to prevent exports of iron ore are more to support the domestic steel industry which will benefit from much lower raw material costs," said Christopher Ellis, analyst with Metal Bulletin.
While land acquisitions remain a big hurdle that could disrupt India's plans, with protests continuing against POSCO's planned $12-billion steel mill that was meant to start producing this year, there is a pending bill in parliament aimed at boosting payouts to poor villagers for industrial projects developed on farmland.
Apart from imposing higher taxes to stop iron ore exports, India also hiked freight rates twice this year, making carriage costs for exports five times more expensive than those for ore for local consumption.
The increased taxes and tariffs pushed the average cost for Indian iron ore to $100 per tonne, more than double the production cost in Australia and Brazil, said Mr. Train.
"That would put Indian material at the top of the cost curve this year. They're almost better off selling into the domestic market," said Train.
The higher cost slashed margins of producers, after taking out handling and shipping fees.
"Before the tax hike, miners earned $40 per tonne, but after the tax incursions the margins have diminished to $10-$20," said Dhruv Goel, managing director at Orissa-based Steel Mint.
"The middle man hardly gets $1 (per tonne)."
Indian exports also suffered from a ban on shipments from the iron-ore rich state of Karnataka, a source of around a quarter of the country's annual exports, from July 2010, as part of the state's crackdown on illegal mining.
The Supreme Court ordered the ban lifted in April but that order has yet to be carried out with the state government citing procedural delays as it installs monitoring and tracking systems. Political infighting may further slow progress.
Gavin Montgomery, iron ore analyst at Wood Mackenzie, said he expects Indian shipments to fall to 65 million tonnes by 2015, prompting big suppliers Australia and Brazil to sell more to China and non-traditional exporters to boost shipments.
The burden of producing more to feed China's demand rests on big suppliers Australia and Brazil.
Brazil's Vale and Australia's Rio Tinto and BHP Billiton , which together control around two-thirds of global seaborne supply, are looking to boost their collective output by half to around one billion tonnes by 2015.
That will equal China's import demand by then as high production costs and low-quality iron ore reserves boost its purchases, according to estimates from Wood Mackenzie.
"With iron ore prices staying around $180 a tonne, the supply can come from a lot of different sources. If Indian supply continues to disappoint, we will see continued reliance on both traditional and non-traditional suppliers," said Mr. Montgomery.