In the latest twist to the iron ore tax hike, traders in China have threatened to boycott the iron ore from India.

This is a move to register their protest against a Rs 300 per tonne hike in duty on iron ore exports from India, which will affect the commodity's price.

In his Budget, Finance Minister P Chidambaram raised the duty, resulting in a hike in iron ore exported from India.

Indian embassy in Beijing has started talks with Chinese trade officials to sort out the issue. 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 made Indian iron ore more expensive as compared to the commodity shipped from Australia and Brazil.

The Chinese threat 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.

According to market analysts, 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.

Sources said Chidambaram's move was aimed at meeting 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.

But sources in the Indian industry said the threat was exaggerated as iron ore is in short supply world over and it is impossible to replace Indian exports in a short period.

India can supply iron ore to China at 7-12 days' notice while it takes 45 days for supplies to come from Brazil and other sources.