China is likely to reduce the amount of iron ore it buys from Iran from March due to concerns that sanctions may disrupt exports worth over $2 billion a year to the world's largest consumer of the raw material, traders said on Wednesday.

Iran is a political ally of China and one of its biggest crude oil suppliers. Iran was also China's fifth biggest supplier of iron ore in 2011, selling some 17 million tonnes, but traders said they expected purchases to shrink in coming months as the sanctions may disrupt shipments and payments.

"There is a huge risk ahead, and many just haven't realised it yet," said a senior executive at a Shanghai-based trading firm that has a long-term partnership with an Iranian supplier.

"It's easy for the United States to freeze our business, forcing large Chinese iron ore traders, which have large trading volumes with Iran, to be more cautious when making bookings. It's not worth taking the risk," he added.

Although Iranian ore accounted for just 2.4 percent of China's total 686 million tonne imports last year, its absence will push up prices as China scrambles for alternative supplies of the raw material used to make steel.

"Iran is one of the major sources for lower-rate iron ore. Without Iranian ore, Chinese buyers will be forced to look for more cheaper materials from Southeast Asia, Latin America, and Africa," said Han Xun, China manager with the Steel Index.

"It may also seek to buy more from dominant suppliers like Australia and Brazil."

The United States expanded financial sanctions against Iran on Monday, adding to a European Union ban on Iranian oil imports from July and sweeping US measures which target Iran's central bank and foreign institutions doing business with it.

The Western sanctions are aimed at pushing Iran to end its nuclear programme, which Tehran says is meant to produce energy, not weapons. Iran, however, has refused to negotiate guarantees that the programme is peaceful.

Chinese buyers usually pay Iranian suppliers via a representative office set up in Dubai, in the UAE, or in other countries. The money is then transferred from banks in those countries to Tehran.

The Shanghai-based trader, who requested anonymity, said the US would find it easy to trace payments made by major trading firms to Iran.

An iron ore buyer based in eastern China's Shandong province said some of his Iranian suppliers had rushed shipments, a sign that they too were worried about potential payment problems.

"We made two bookings due to be delivered separately in early and late February, but our Iranian supplier delivered the two shipments together in early February due to concerns that they might not be able to deliver later in the month," he said.

"I expect imports from Iran to show a decline in March."

Last year, China's commerce ministry warned traders against buying Iranian ore, saying shipments were often substandard and late. Trade, however, was up 14 percent on the year in 2011 and some Iranian sellers said that so far, it was business as usual.  - Reuters