Steeling for Change

2010-09-12 06:12ByLANXINZHEN
Beijing Review 2010年29期

By LAN XINZHEN

Steeling for Change

By LAN XINZHEN

Removing steel export tax rebates reflects the government’s determination to pursue energy conservation

China will scrap tax rebates on exports of 48 steel products starting on July 15 in a move to rev up economic growth pattern and economic reform.

The decision disappointed local steel mills hoping for more government support as they face potentially calamitous margin pressures in the third quarter as well as declining exports as a result of the appreciating renminbi.

China raised steel export rebates to 9 percent in June 2009. The rebate removal a year later will be equal to a cost increase of 9 percent on steel mills.

The government will also take action against rebates on exports of high-polluting and energy-consuming industries in the coming years, said Zhang Yansheng, Director of the Institute of Foreign Trade of the National Development and Reform Commission.

Pollution

The iron and steel industry, with severe overcapacity and outdated products and technologies, is one of China’s major energy consumers and the largest polluter. The restructuring of this industry commenced several years ago, and the recent export rebate removal is one step of the whole process. The measure could have been introduced much earlier had it not been for the fnancial crisis in 2008, Zhang said.

But now, the timing of the rebate removal is just right—exports of steel products rebounded this year, with 18 million tons shipped abroad between January and May, up 132.7 percent year on year.

The adjustments will hopefully help the country attain its emission reduction goal for the year. China pledged to cut energy use per unit of GDP by 20 percent by the end of 2010 from 2005 levels, but only reduced consumption by 14.38 percent between 2006 and 2009. In the frst quarter of 2010, energy use per unit of GDP even increased 3.2 percent, making it a formidable target to fulfll in the remaining fve months of this year.

A May notice from the State Council on emission targets from 2006-10 said that 30 million tons of iron-refning capacity and 8.25 million tons of steel-refning capacity still had to be shut down in order to achieve the fveyear target.

As exports rebound against weak domestic demand, discouraging exports by increasing the costs of iron and steel products has become one of the government’s solutions to wiping away the industry’s overcapacity.

“Apparently, it’s a signal indicating the country has prioritized emission reduction and economic reform in the coming years,”said Zhang Lin, an analyst with Lange Steel Information Research Center, China’s leading steel information service provider.

Prices

The rebate removal policy was introduced with surprising speed and only added insult to injury for steel mills already expecting to post losses in the third quarter, said Mei Xinyu, a researcher with the Institute of International Economics and Trade of the Ministry of Commerce. Steel mills at large are facing diffcult times—while a string of measures aimed to cool off the red-hot housing market has cut domestic demand for steel products since April, the rebate removal will force some of them to cut exports.

The removal will squeeze producers’margins, with large steel exporters bearing the brunt. Unlike previous export rebate adjustments, the policy this time affects up to 40 percent of steel exports, and exporters will earn approximately 300 yuan ($44) less for each ton of steel. The whole industry could witness a decrease of 3 billion yuan ($441 million) in revenue if the country’s exports remain at 48 million tons this year.

“It’s likely steel plants will cut production in the second half of this year,” said Wan Wei, a researcher with Aijian Securities Co. Ltd.

The iron ore dice have been cast and price hikes in the third quarter are inevitable, Wan said. All steel mills have to do is cutting production as steel prices come close to, or even fall short of, costs on the domestic market.

Domestic steel prices will not necessarily rebound, and instead could linger at low levels in the second half of this year even if steel plants slash production, because large steelconsuming industries haven’t shown signs of picking up in demand, Wan said.

SOLID EXPORTS: Hebei Iron and Steel Group survived the market depression in 2009 by further integrating production of all its branches

Whether price increases are acceptable to importers of Chinese steel products, particularly because China’s exports are just picking up while overseas demand has yet to be unleashed, has also come into question, Wansaid. If not, pressure on the domestic market could be aggravated when export-oriented products have to be sold at home. The rebate removal could also force steel prices to drop, and in turn, cause drops in iron ore and coke prices, Wan said.

But Wan said the removal would have limited infuence on China’s exports because steel products account for only 3.3 percent of the country’s total exports.

FOR THEENVIRONMENT:Steel is processed at a facility inBaotou Iron andSteel (Group) Co. Ltd. High-polluting and resourceintensive steelmills with outdated technologies orovercapacity arethe major targets of industrialstructure reformin China

Long-term benefits

The policy this time mainly targets steel products that either have a great impact on the environment or overcapacity to be eliminated, and is basically in line with the guidelines for the industry’s reform, said Mei. It is conducive to reducing homogenized competition on the low-end steel market, and urges steel mills to increase research investments to develop new products. “It will beneft China’s steel plants in the long term, except for small mills which have to cease operation,” Mei said.

Predictions hold that 44 listed steel companies will suffer losses in the third quarter this year, but they will ride out the diffculties, because the rebate removal will turn over a new leaf for China’s steel industry, said Zhang Shibao, an industrial observer with China Merchants Securities Co. Ltd.

Canceling rebates will encourage steel mills to take the initiative to cut unnecessary production, give up outdated products and technologies, and optimize their product portfolios to take advantage of this round of adjustment to sharpen their competitive edge, Zhang said.

The steel market will fnd a new balance during the industrial reform process.

Steel companies in Shandong and Hebei provinces will suffer most, because the two provinces export mostly steel products inclusive in the 48 items that received rebates.

But they welcomed the policy with confdence. The adjustment will bring steel mills opportunities to develop high-value added steel products for shipbuilding, auto and machinery manufacturing, as well as marine engineering, said Shandong Steel Group Ltd. It will also test these companies’ survival skills in a new industrial climate.