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SHANGHAI, Jan 27 (Reuters) - Chinese steelmakers and power plants are being forced to shop around for higher-quality raw materials to meet tougher air pollution standards, a move that will be a boon for global mining giants that produce premium-grade iron ore and coal.
Beijing, under heavy public pressure to cut pollution after a series of hazardous smog crises in many major cities last year, has vowed to raise emission standards and shut polluters in big industrial sectors like steel, cement and power.
The air pollution campaign could squeeze out iron ore suppliers from Iran, Mexico and Vietnam, but would be good news for others from Brazil and Australia, like Vale, BHP Billiton and Rio Tinto as well as Australian coal exporters that supply top grade raw materials.
It could also undermine China's efforts to diversify its sources of iron ore away from Australia and Brazil, which account for more than 70 percent of imports and - according to Beijing - have an undue influence on the way prices are set.
"Mills used to take cargoes with various grades as long as they are cheap and never questioned about minor ingredients, but more and more customers are starting to look into the specs before buying," said an iron ore trader in Beijing.
Higher-grade iron ore is more efficient for steel makers and contains fewer additives which cuts down on emissions.
Smaller iron ore exporters have become popular sources of cheap supplies in recent years. Iran ranked fourth on China's list in 2013, behind Australia, Brazil and South Africa, with deliveries up 29 percent in a year.
But while Iranian ore can be as high as 65 percent iron, some of it contains up to 1.5 percent sulphur, which generates high levels of pollutants when removed during processing. Sulphur levels can reach 2 percent in Indonesian and Mexican ore.
By contrast, iron ore from the big three mining firms grade above 57 percent but with just 0.05 percent sulphur.
Smaller exporters are already losing their competitive edge as Chinese demand slows and supplies from Australia surge.
Australia's market share rose by 4 percentage points to account for 51.2 percent of China's total imports in 2013, while Brazilian miners claim a near 19 percent market share, up from just 8.6 percent a year earlier.
Miners in both countries are in the midst of multi-billion dollar expansion work to dig hundreds of millions more tonnes of ore in the next few years.
"More supplies from Australia and tougher environment protection measures will eventually force non-mainstream suppliers to either cut prices or shut down production," said an iron ore purchasing mill official.
Beijing's campaign has so far focused on the top steel producing province of Hebei surrounding the capital, responsible for a quarter of total output and blamed for most of the smog choking the capital.
The pollution controls serve a wider strategy, with Hebei determined to slim down its bloated steel sector. Governor Zhang Qingwei warned local bureaucrats this week that they will be fired if another tonne of capacity is built on their patch.
Hebei aims to cut 15 million tonnes of outdated steel capacity this year and 60 million tonnes by 2017. The supply cut will ease margin pressures and allow survivors to turn to higher-quality ore to meet new standards, analysts say.
Traders said firms have already have started to test for minor elements like manganese and arsenic as well as routine ones like sulphur and phosphorus when shopping for iron ore.
The step-up in environmental checks has also prompted some power plants to switch to higher grades of coal.
"Many power plants are beginning to worry about the inspections and have begun to switch to higher-quality coal with lower sulphur and ash content," said a Beijing-based trader.
China's imports of lignite, a type of coal with low heating value, have surged in recent years, thanks to an abundance of cheap supplies from Indonesia and Vietnam. However, the high moisture content of lignite means it emits more carbon dioxide than higher quality coals.
Expectations that Beijing may soon introduce even more stringent requirements on coal use at power plants have also led miners to hold off on signing fresh contracts with Indonesian suppliers, trade sources said.
A policy setting new minimum heating values for lignite, currently at the draft stage, would benefit Australian miners who produce low-ash coal of high calorific value, and threaten the export prospects of Indonesia's low-ranked coal miners.
China imported about 87.5 million tonnes of lignite in 2013, mostly from Indonesia.
Enquiries for Indonesian coal with heating value of around 3,800 kcal/kg (NAR), previously popular with Chinese buyers, have already dried up, traders said, adding that buyers are now switching to coal with at least 4,700 kcal/kg (NAR).
"We think that the majority, perhaps as much as 80 percent of the total volume, of Indonesian lignite would struggle to fit the minimum heating value requirement," Macquarie Bank said in a recent report.
$1 = 6.0521 Chinese yuan Additional reporting by David Stanway in BEIJING; Editing by Richard Pullin