Further adjustment in China's steel export tax rebate

SteelOrbis Shanghai China's Iron and Steel Association (CISA) has disclosed that the Chinese government is to announce a further adjustment to its refund policy for steel exports in the coming days. In addition, it has been reported that the issue is currently being discussed by the National Development and Reform Commission. The core of the new policy is that the rebate rate for high value-added products will be reduced to five percent, while the rebate rate for normal products will be canceled. Also, an interim tariff may be imposed on low value-added products. The new policy is likely to be announced around December 15 and to be made effective as of January 1, 2007. Based on the current situation, the new policy is expected to have a greater impact on domestic market prices than on exports quantities. Influenced by macro-control measures, China's steel consumption declined continuously during the second half of the year, with Jan-Oct growth lower than GDP gain for the first time in recent years. Meanwhile, crude steel production still continued to maintain relatively rapid growth. Therefore, the Chinese mills were obliged to solve the problem of insufficient market demand by means of exporting. At the same time, the international economy is in good state on the whole. Despite the softness of the US economy recently, Asia, Europe and the Middle East still moved steadily upwards. Generally speaking, demand for steel products remains at fast growth levels, which are mainly fed by Chinese exports. Therefore, China's steel exports may decline somewhat after the adjustment of the export rebate, but not by a big margin. However, since price is the main strength of China's steel products, the Chinese mills have had to lower their ex-factory prices in order to eliminate the impact of increased export costs, leading to a downward trend in the domestic market. Obviously, based on relatively high profit levels, mills are able to bear the increased export costs. The market behavior after November 1 has already proved this point. In early November, both domestic mills and foreign traders adopted a wait-and-see stance. Then, with the decrease in semis prices in the domestic market, rolling mills in Southeast Asia failed to find any supplies cheaper than that the Chinese ones and so again made purchases from China. Both sides agreed to divide the newly-added costs between them. All in all, the adjustment to the export rebate policy will cause a price decrease in the domestic market. However, we cannot exclude the possibility that the mills will try to export more before the implementation of the policy, thus leading to an insufficient domestic market supply and boosting up market prices in the short run. On the other hand, exports are unlikely to go down by a big margin when new policy becomes effective.