India is considering an export tax on low-grade iron ore after small steel producers urged the government to curb its overseas sales, two sources directly involved in the matter said.

China typically accounts for more than 90% of overall shipments of iron ore from India, which is the world's fourth largest producer of the steel-making ingredient.

Demand for steel in India, the world's second-biggest crude steel maker, has raised iron ore consumption in the country and earlier this month small steel producers petitioned the Ministry of Steel to take measures to restrict exports to help ensure sufficient local supplies at affordable rates, the sources said.

A decision on whether to impose an export tax will depend on the recommendations of the Ministry of Steel, which did not respond to a Reuters request for comment on Monday.

The government was examining the issue, including iron ore export data and small steel producers' demands, the sources, who are directly involved in decision-making, told Reuters. They declined to be identified as the deliberations are not public.

India in May 2022 raised the export tax on low-grade iron ore lumps and fines - with iron content below 58% - to 50% from zero, and hiked the duties on pellets to 45% from zero, as part of efforts to meet rising local demand.

But when exports trickled to a halt, the government scrapped these taxes November 2022 and currently allows duty-free exports of low-grade iron ore or ore with iron content below 58%. India primarily exports low-grade iron ore.

Indian iron ore exports touched 32.2 million metric tons during the first nine months of the current fiscal year that began in April 2023 - worth $2.7 billion - from 9.5 million tons a year ago, government data reviewed by Reuters shows.

India's steel demand is likely to stay strong as the government expects economic growth to outpace the global economy in the next fiscal year.

In 2023, China's iron ore imports hit a record high of about 1.18 billion metric tons as Chinese demand surged and its steel exports picked up, with a lot of shipments of finished steel coming into India.

The Federation of Indian Mineral Industries (FIMI), an industry body of mining firms, has written to the federal steel minister asking the government not to curb iron ore exports.

"We request that any proposal for banning/restricting exports of iron ore and pellets may kindly not be considered and status quo of nil export duty on these products be maintained," FIMI's letter, which was seen by Reuters, says.

FIMI also said India ships out only low-grade iron ore, which is not widely consumed within the country, and overseas shipments of this grade should not be restricted.

Small steel producers insist that they use low-grade iron ore, unlike big steel mills, and steady supplies at reasonable prices are vital for their relatively small profit margin.

India is expected to produce 330 million tons of iron ore in the fiscal year beginning April 2024, according to industry estimates, an 18% increase from an estimated 280 million tons this year, as more mines become operational.

(Reporting by Neha Arora; Editing by Mayank Bhardwaj and Alexander Smith)