New | Global steel prices to gain from China's scrapping of export tax rebate
Cancellation of the export duty rebate may open the door to Russia in the international market
China's cancellation from January 1 of an export tax rebate on steel alloys that contain boron may provide support for international steel prices and prompt Russia to fight for market share in the trade, analysts said.
"About 30 per cent of [steel] exports are being affected by this policy change, according to January-November trade data from the customs," said Kevin Bai, an analyst at metals and mining consulting firm CRU China.
Boron is a chemical added to steel products to increase steel quality. But more and more Chinese steelmakers, including some unqualified ones, exploited this to earn export tax rebates, leading to trade friction especially with Southeast Asian countries, which imported large amounts of steel from China.
Bai estimated the decline in China's steel exports as a result of the rebate cut at less than 30 per cent as producers were replacing boron with chrome, another chemical, as an additive in steel production in order to continue to qualify for the rebate.
However, adding chrome would be costlier than adding boron. Using boron would push the cost of producing a tonne of steel up by just 4 yuan (HK$5) to 5 yuan, but it could be 40 to 50 yuan per tonne more in the case of chrome, Bai said.
Custeel, a steel industry information provider in China, estimated the country's steel exports to decline 20 to 30 per cent in the first quarter of this year from the previous quarter.
It said 26.2 million tonnes of steel containing boron were exported from January to November last year.
Steelmakers could enjoy an export tax rebate of 9 to 13 per cent when they added boron to the steel products, equivalent to 200 to 300 yuan for every tonne of steel exported, analysts said.
The lack of a tax rebate means more pressure for steel exporters to raise export prices to avoid losses.
"[Steel exporters] would have to raise steel wire export prices by 25 per cent to stay profitable," said Hu Yaping, the chief analyst at Custeel.
Joey Chen, an analyst at Daiwa Capital Markets, said: "In a more extreme case, China's steel exports could be reduced by about 15 million tonnes due to the policy change."
Chen said the decline in supply in the international steel trade could provide support for prices, but the worsening oversupply at home would put pressure on domestic prices.
Bai said: "Chinese steel prices kept dropping due to weak domestic demand, low iron ore prices and an oversupplied market. So this policy is expected to put further pressure on domestic prices."
From January to November last year, China exported 83.6 million tonnes of steel products, up 46.8 per cent from a year earlier. For the full year of 2013, the country exported 62.3 million tonnes.
"Southeast Asian countries and Latin American mills will benefit from this policy change as these regions complained the most about increasing Chinese exports hurting their domestic industry," said Bai. "Russia competes with Chinese hot-rolled steel exports, so a reduction in hot-rolled exports may provide some opportunity for Russia to fight for market share."
He added that the recent slump in the rouble might enhance the competitiveness of Russian exports.
Russia and China have traditionally focused on different markets in steel exports. Russia's hot-rolled exports have been focusing more on European markets while those from China targeted Asian markets.
The decline in Chinese exports opens the door for a change in the global steel trade flows.
According to data from the International Steel Statistics Bureau, China was the world's biggest steel exporter while Russia ranked sixth in 2013.
China's major competitor in the Asian steel trade, Japan, might not directly benefit from the decline in Chinese exports as steel products containing boron were mainly low-end products, while Japanese exports were mainly high-end steel products, analysts said.
