China will restore value-added tax on high-end, export-oriented steel products after a six-year hiatus for its largest producers — a move analysts said should keep more of the metal at home and help avert a trade row with Western nations.
From Friday, all high-end steel products made for processing and sale overseas — such as metal for containers and ships — would again be subject to a 17 percent tax on value added in sales, according to a finance ministry and tax bureau circular.
That would end preferential treatment since 1998 for about 40 steelmakers, including the three biggest, Baosteel Corp., Angang Iron and Steel Group Corp. and
Wuhan Iron and Steel.
At that time, the policy had been to encourage major firms to export more and replace imports. But China is now sparring with rich nations over growing shipments of everything from textiles to shoes, and paying more to import iron ore and coal.
"It's part of China's recent precautions, to prevent steel exports from becoming another thorn in trade with the United States and the European Union," said industry analyst Liang Mingchao at Tianxiang Investment Consulting Co.
The world's top steelmaking country was on the verge of becoming a net exporter on an annual basis, possibly this year, sparking fears of a flood of steel to a market that only recently emerged from years of stagnation, analysts said.
China's steel exports nearly tripled year on year to 9.37 million tons in the first five months, not far off imports of 10.7 million tons, which were down 31.5 percent from a year earlier, customs data showed.
The country is expected to churn out 300 million tons of steel in 2005, up 10-14 percent from 2004 and accounting for more than a quarter of the world's total.
China's latest move follows a series of policy moves to cool the booming industry, including cutting export tax rebates on steel products — mostly low-end — from 13 to 11 percent and limiting the number of iron ore importers.
China has reined in other red-hot sectors, such as property, for over a year to slow an economy that grew 9.4 percent on year in the first quarter of 2005.
"Policies have increasingly been aimed at curbing steel exports in 2005, to help alleviate a shortfall of iron ore and coal," said industry analyst Yong Zhiqiang at Haitong Securities.
Under growing pressure from an official clampdown, domestic steel prices have slid more than 10 percent on average since early April, after peaking in late March.
That helped widen a roughly 20-percent gap between domestic and international steel prices, pushing more steel producers to look at the global market, analysts said.
"Steel enterprises will be subject to the value-added tax from July 1, without exception," the finance ministry and the tax bureau said in their circular on the Web site of the China Iron and Steel Association.
Analysts said the move was more a warning against excess exports than an actual hit for the earnings of steelmakers as their exports remained relatively small versus overall output.
For instance, the 40 firms sold a combined 5.74 million tons under preferential treatment, or less than 150,000 tons each, in 2004. That comprised just 2 percent of China's total steel output that year, according to domestic media reports.
"Impact on profitability is minimal but the statement is clear — that exporters should think twice," Liang said.
