May 1 marks the beginning of China's week-long Labor Day holiday. Following the tax rebate reduction on April 15, on the eve of Labor Day (April 30) the Chinese government announced the introduction of an export license system for most steel products to be effective from May 20. There are also rumors that the government may impose further restrictions to curb steel exports.
One of these potential future restrictions is thought to be the increase of the current 10 percent export duty on semi-finished steel to 15 or 20 percent. Meanwhile, certain duties may also be imposed on exports of some finished products.
The reduction of the export tax rebate has led to an increase in Chinese export prices. Meanwhile, a decrease has been observed in ex-CIS steel product prices and in the other international markets. Consequently, Chinese exporters may begin to come under pressure in the forthcoming months if the gap narrows down and the CIS export supply increases further. On the other hand, China's domestic steel market has seen strong movement throughout April for all products, making it more difficult for exporters to reduce their quotations. In the last days of April, in other words just before the week-long Labor Day holiday, steel prices in the domestic markets increased significantly. Besides, many mills have either increased their export prices for May or else have left them unchanged from the levels in April.
A probable decrease in the quantity of Chinese steel exports may be reflected directly in greater pressure on the domestic market. However, turning to another important issue, the Chinese government has also announced that it intends to eliminate 24 million mt of out-of-date steelmaking capacity in 2007, which is equal to around five percent of China's total steelmaking capacity.
To sum up, considering the strong domestic demand and high ex-factory prices, steel prices in China may be expected to remain high and even increase slightly when the holiday is over. However, the government's policies are expected to influence exports eventually within the next few months, which may lead to price declines unless the mills adjust their production in consideration of such future pressure. China's determination in shutting down outdated capacity will be another important factor in sketching the outline of the market in the second half of the year.