Indian embassy in Beijing has began talks with Chinese trade of ficials to contain what could be a emerging storm in the Sino-Indian relationship.
The Chinese steel industry said it would obtain iron ore from other sources like Australia and Brazil to meet the shortfall that would be caused by the boycott move.
The trade on this commodity has already come to a halt with local buyers asking several China-bound ships to return to India.
The duty hike of made Indian iron ore more expensive as compared to the commodity shipped from Australia and Brazil, the industry said.
The Chinese threat, if implemented, would mean a crash in total Indian iron ore exports to China. China is the biggest destination for Indian iron ore, while India is the third largest supplier for the Chinese steel industry.
Yan Bangsong, deputy director of China Chamber of Commerce of Metals, Minerals and Chemicals, Importers and Exporters (CCCMC), said that Chinese steel makers were being forced to pay an additional $500 million on existing deals as Indian suppliers were demanding a higher price to cover the duty hike.
The Indian government has hiked the export duty by Rs 300 a tonne. Sources said Chidambaram's move was to aimed to meet the rising demand for iron ore within the country as well as discourage the use of Indian iron ore to feed the runaway growth being seen in the Chinese steel industry, which directly competes with Indian steel.
But sources in the Indian industry said the threat was exaggerated as iron ore is in short supply worldover and it is impossible to replace Indian exports in a short period.
"India should not come under pressure. There is no way the Chinese can replace Indian iron ore in the next one year. It is very difficult to enough quantities of this commodity. Besides, India can supply at 7-12 day notice while it takes 45 days for supplies to come from Brazil and other sources,"Vijay Singh, the Beijing chief representative of the Mumbai-based Ispat Industries, told TOI.
India supplied 66 million tonnes of iron ore meeting 22% of Chinese imports while Brazil and Australia met most of the remaining demand.
"We have seen some media reports expressing concerns of Chinese importers. We are in touch with relevant Chinese trade bodies engaged in iron ore trade. The views of these trade bodies have been conveyed to the concerned agencies in India,"an Indian embassy official in Beijing, said.
A recent analysis by Macquarie Bank Ltd, the largest investment bank in Australia, suggested that Chinese steelmakers would import larger amounts of steelmaking ingredients in 2007 and 2008.
"The pace of Chinese industrial production is expected to increase as infrastructure spend accelerates, in part due to surplus liquidity," it said.
Going by this forecast, there is no way China would boycott a major iron ore supplier like India, sources said.
CVRD, regarded as world's largest iron ore supplier, signed a deal to invest $6.5 billion on a nickle processing plant in China.
This is seen by some observers as a barter deal to ensure larger quantities of Chinese buying for Brazilian iron ore, which it mainly sells, sources said.