China confirms plan to cancel export tax rebate on longs and billets
China's plan to cancel the tax rebate on
billet and long products exports has finally been confirmed, but the consequences are still unknown, hard to predict and fearsome.
After weeks of speculations and reports based on inside sources, an official with the tariff department of
China's Ministry of Finance (MOF) finally confirmed that the Chinese government is considering eliminating export tax rebates on billets and long products. The minister said that the plan has already been reported to the tariff commission under the State Council. SteelOrbis understands that the plan is primarily directed to control the steel industry's
consumption of raw materials and energy.
The huge profits in the steel business keep attracting investors, and the government is aiming to control
investments in steel making giants that consume incredible amounts of energy and raw materials, particularly
iron ore.
Even though the discussions are confirmed now, it has to be underlined that there is nothing concrete yet. The plan is still being discussed among the official bodies. On the other hand, SteelOrbis would like to emphasize that the words “long products” have also been mentioned in the plan.
The Chinese government is apparently not happy with ever increasing steel exports, which in turn cause growing
consumption of raw materials, including
iron ore, power, coal and coke. The government also does not want an excessive flow of steel products to foreign markets, as these products are deemed critical for the development of the country. Certainly the latest surge of exports has not made the government happy either.
Market sources predict that exports of billets and long products will reach a total of 16 million tons in 2005, which would create an export tax rebate bill of over RMB 6 billion, which equates to more or less $725 million. If the rebate is eliminated, the steel industry stands to lose a huge portion of its profits.
Of course, as mentioned by SteelOrbis earlier this week, the cancellation of the export tax rebates will certainly increase the supply of billets and long products in the Chinese domestic market, resulting in both falling prices and profits.
The consequences of the implementation of such a plan, i.e. cancellation of export tax rebate on billets and long products, can be really harsh on the Chinese steel industry. Smaller steel producers in particular will be hit very badly. Therefore, we think the government may opt to modify the plan before putting it in effect. They may start by canceling the tax rebates on
billet exports first, and then consider eliminating the tax rebates on long products exports later. If that would be the case, as also mentioned by SteelOrbis earlier this week, the international market would be flooded by Chinese long products exports.
It looks like a very tough decision to make, as it is not only related to the Chinese steel industry, the fate of steel producers there, and the new investors, but also effects the worldwide steel markets.