Export rebate cancellation could spark consolidation

Export rebate cancellation could spark consolidation

The decision of the Chinese government to cancel the 13% rebate on exports of steel billet came into effect on April 1, 2005. The move has small steel traders feeling the pressure since they will no longer be able to export their steel billets and ingots at favorable prices. During the buildup to the export rebate cancellation, China's steel exports through the first two months of 2005 jumped 7.5 times year on year to 1.4 million tons. While small steel producers may fear for their ability to survive minus the ability to ship their products abroad easily, major Chinese steel producers think that the cancellation of the tax rebate will help the industry. These majors believe that it will lead to a decrease in the sky high iron ore prices. Furthermore, the cancellation of the rebate will clear the way for major steel producers by pulling the plug of many smaller producers that lack long-term and stable iron ore supplies. Many of the major steelmakers are predicting that a wave of consolidation will overtake the Chinese steel industry fairly soon thanks to the cancellation of the rebate. Such a scenario was not the main reason the government took the decision to revoke the rebate, however. Beijing maintains that the rebate was withdrawn due to the inflationary threat of quickly increasing steel prices. China's steel production reached 50.1 million tons during the first two months of 2005, a 22% year-on-year increase. On the other hand, steel investments in the country dropped 9.5% year on year to $1.86 billion. The country's steel production is expected to reach 250 – 300 million tons by the end of the year.