Upcoming tax rebate decline worries local market

No accurate schedule has been sketched out for the new tax rebate rate announcement so far. Nevertheless, all kinds of predictions and the messages leaked by officials are flowing in Chinese steel market. Several months ago, it was said that steel export tax rebate would be dropped from the current 11% to 5%. In July, the most popular opinions were predicting the steel tax rebate to decline from 11% to 8% and the policy to go into effect on August 1, 2006. However, it is already August 7, and it seems that all of the guesses mentioned above have turned out false. Chinese government will, most likely and inevitably, adjust the steel tax rebate from the current 11% to a lower level before the end of 2006. The delay in issuing the policy reflects the state's dilemma: On one side, massive steel exports harm economy's healthy development with the problems such as serious pollution and antidumping; on the other side they contribute to releasing local market pressures caused by domestic surplus capacity. No matter when the policy would be issued or by how many percents the tax rebate would decline, local market expresses worry rather than satisfaction. The worries mainly stem from the two aspects: 1. Steel tax rebate may be adjusted more than once in near future Currently, overall steel prices in China are still lower than that of the world markets. At the end of July, in Shanghai: 3.0 mm hot rolled coil was $499/ton, 1.0 mm cold rolled coil was $600/ton, 1.0 mm hot dip galvanized was $665/ton, and 20 mm plate was $435/ton. Meanwhile, ex-factory prices of the same products in the EU and US were: $616-718/ton for hot rolled coil, $731-838/ton for cold rolled coils, $858-926/ton for galvanized, and $770-960/ton for 20 mm plate. Even when the freight is taken into account and overseas prices are assumed to retain the current level, it is apparent that 3 or 5 percent drop of tax rebate would not push Chinese prices up to the same level with the world markets. Therefore, state may be forced to reduce the tax rebate rate for several times. To obtain as much profit as possible, both mills and traders have strong drives to expand their exports right now before the announcement of the policy. In fact, China's steel exports have rallied recently. Overseas importers have also hurried in order to complete their purchases before the tax rebate decrease announcement. 2. Traders are afraid of being unable to predict their losses In China, it is possible that the tax rebate policy may suddenly be issued just tomorrow and come into effect only within a week. Traders are deeply concerned about two issues that may occur in this case: Steel mills may unilaterally annul the contracts, or they may make losses over the prices of their previously concluded contracts. Many medium and small mills are accustomed not to fix their sales prices until the delivery of the steel they produce, which is normally one month later. Therefore, the sales price is generally decided by the future market price trend. Of course, mills do not want the market price's to drop. Some malevolent mills may annul the signed contracts excusing government's policy adjustment as a “force majeure”. On the other hand, the traders, who purchase the goods from the mill and sell to foreign importers, will be claimed for compensation by the importers as they fail to deliver on time. There is another possible dead end for traders: if the policy would be issued after they concluded sales contract but before exporting their products, then the fixed sales price and increased cost would lead to less profit and even loss for traders. Therefore, traders must hasten to load and ship their steel. Tax rebate decrease is also a strong indicator that the government would put forth more policies in the future to reinforce the control on steel exports. As a matter of fact, supply and demand balance is liable to face great changes.