Research on China billet/slab export rebate cancellation influence

Research on China billet/slab export rebate cancellation influence

On March 28th, 2005, China's Ministry of Finance and the State Administration of Taxation issued financial tax document No.57 for 2005, which declared an end to the export rebate on DRI, pig iron, steel ingot, billet and slab, effective April 1st. The following study examines the macro-background of the billet/slab export tax rebate cancellation and how it might affect the domestic steel industry of China. 1. The macro-background for billet/slab export rebate cancellation (1) China has changed from a net billet/slab importer to net exporter Although the billet/slab exports of China reached the peak level of 4.34 million tons in 2000, China remained a net importer from 1999-2003. In other words, China had always stood as a net billet/slab importer until 2004. In 2004, China's exports reached 6.06 million tons against 3.86 million tons of imports. (2) Skyrocketing steel output increases profits of steelmakers Large and medium sized steelmakers of China produced a combined 232.18 million tons of raw steel in 2004, up 19.6 % year on year. Gross profit reached RMB 81.18 billion, up 60.59% year on year. These two figures are respectively 92.02% and 566.81% higher than those of 2000. This indicates that Chinese steelmakers have been able to increase their profit margin. In addition to the increases in prices and production capacity, lower manufacturing costs and structural upgrades have also contributed to the rising profits of Chinese mills. Unit: in 100'000 tons

                   2000     2001     2002     2003       2004
raw steel          1'209    1'376    1'693    1'941      2'322 
(% increase)       
profits            9.28     13.83    23.06    14.61      19.60
(RMB 100 million)  121.74   163.81   239.63   482.31     811.78 
(% increase)       173.45   34.56    46.29    101.27     60.53  

Take year 2004 for example: China billet/slab export value reached $2.32 billion, up $1.94 billion year on year. The total export rebate for that year would have been RMB 2.489 billion, calculated on a 13% tax rebate rate. This figure marks a RMB 2.08 billion year-on-year increase, which is quite small compared to the industry's total profit value. Therefore its influence can be neglected. (3) Imported iron ore price soared; coal, electricity and oil transportation became limited The domestic coal, electricity, and oil transportation situation of China has remained tight since 2003. Meanwhile, the investment scale headed by real estate has been expanding widely. Therefore China decided to apply a macro-adjustment to alleviate the tight national economic development situation. The domestic real estate investment projects under construction in China in 2005 amount to RMB 20 trillion. China's steel demand is so great that encouraging exports of raw materials would adversely affect the domestic steel price. Furthermore, international iron ore prices surged 71.5% for fiscal 2005-2006, meaning continuing billet/slab export would further increase domestic iron ore demand. This is bad for the development of China's domestic steel industry. Moreover, billet/slab production consumes energy itself: The 6.06 million tons of billet/slab exports in 2004 consumed 10.61 million tons of iron ore and 4.3 million tons of standard coal. It also consumed a transportation capacity of 24 million tons. 2. The effect of Chinese billet/slab export tax rebate cancellation on both the domestic and international market (1) Billet/slab supply in international market will be insufficient Chinese billet/slab export traditionally targets the Asian market. In 2003, China exported 1.47 million tons of billet/slab, 99.96% of which were destined to Asian countries. In 2004, China shipped almost all (97.84%) of its 6.06 million tons billet/slabs exports to Asian countries. From another point of view, China exported 2.26 million tons of common billets in 2004. Only 14.4 thousand tons were exported to Nigeria, and the rest landed in Asian areas, accounting for 99.36% of the total. China exported 303.3 thousand tons of common billets in 2003, all of which ended up in Asian countries. China exported 2.3925 million tons of common slabs in 2004. 95.44% (2.2833 million tons) went to Asian countries. In 2003, China exported 1.0025 million tons of common slabs, most of which were exported to Asian areas, expect for 9200 tons to Switzerland. China billet/slab export to different countries for 2003-04 Unit: ton

 
Country               2004                           2003
              Quantity   proportion(%)       quantity   proportion(%)
 
Subtotal of 
Asia           5'927'740    97.84              1'469'643    99.96
China Taiwan   1'881'610    31.06                500'954    34.07
S.Korea          974'179    16.08                319'505    21.73
Thailand         923'859    15.25                 59'883     4.07
Vietnam          644'272    10.63                137'663     9.36
Indonesia        516'924     8.53                 72'914     4.96
Malaysia         305'528     5.04                110'327     7.50
Hongkong S.A.R   218'540     3.61                185'990    12.65
Japan             76'209     1.26                 81'924     5.57
the US            85'754     1.42                    108     0.01
others            239'983    3.96                    868     0.06
total           6'058'853  100.00              1'470'292   100.00
 
 China common billet export to different countries  for 2003-04    

 Unit: ton 
       
Country                  2004                          2003
                 quantity    proportion(%)     quantity   proportion(%)
China Taiwan    623'286.75    27.59             38'377.62    12.65
Vietnam         417'036.85    18.46             89'732.56    29.58
Thailand        330'571.04    14.63              5'158.49     1.70
S.Korea         253'430.48    11.22             79'232.26    26.12
Indonesia       174'436.72     7.72                           0.00
Hongkong S.A.R  150'482.13     6.66             82'348.63    27.15
Burma            81'380.60     3.60                           0.00
Philippines      64'034.40     2.83                           0.00
Malaysia         54'200.59     2.40                           0.00
Iran             48'980.20     2.17                           0.00
Japan            20'199.52     0.89               8'496.61    2.80
Sri Lanka        14'388.35     0.64                           0.00
Singapore         9'509.38     0.42                           0.00
Sudan             2'967.56     0.13                           0.00
Nigeria          14'420.96     0.64                           0.00
Total         2'259'325.54   100.00             303'346.16   100.00

 China common slab export to different countries for 2003-04  
 Unit: ton 

Country                  2004                          2003
                quantity    proportion(%)     quantity   proportion(%) 
Taiwan Province 711'921.43    29.76           393'437.66   39.25
Thailand        470'091.86    19.65            54'613.27    5.45
S.Korea         453'200.58    18.94           198'779.03   19.83
Malaysia        224'971.76     9.40           110'302.27   11.00
Indonesia       203'846.12     8.52            72'892.49    7.27
Vietnam          72'562.27     3.03            37'758.76    3.77
Japan            46'805.99     1.96            68'956.46    6.88
Sri Lanka        30'631.14     1.28                         0.00
Turkey           28'410.06     1.19                         0.00
Hongkong S.A.R   26'626.74     1.11            65'743.26    6.56
India            14'226.06     0.59                         0.00
the US           79'092.92     3.31                         0.00
Italy            29'928.54     1.25                         0.00
Swiss                          0.00                 0.92  0.0001
Asia total    2'283'294.01    95.44         1'002'483.19  99.9999
Total         2'392'315.47   100.00         1'002'484.11  100.00
 

(2) Analysis on recent billet/slab price trend in the Asian market and billet/slab supply capacity by different countries Before China's steel tax rebate cancellation took effect, the previous supply and demand situation in Asia changed due to the intermittence of domestic suppliers' exports. Because of insufficient supply, Asian areas turned to the CIS for most of their orders. This pushed the billet/slab price up in the region. At present, the common billet export price in Ukraine is $360-370/ton (FOB). Asian buyers' C&F price is between $400-420/ton. The common billet export price in Russia is over $390/ton (Fareast FOB). Common slab export price remains at $520/ton (CFR Europe). The key point in researching the future billet/slab market in Asia is to ascertain whether the CIS can serve as a major supply origin and thus remedy China's billet/slab export reduction. Russia: The labor-intensive development potential of Russia's metallurgical industries was maxed out in 2004 Mine exploration, coke production and metallurgical output all exceeded that of 1991. Lacking new large-scale steel mills, it is impossible for Russia to increase its steel output further. Meanwhile, Russia will increase its domestic distribution quantity for expanding domestic steel demand. In addition, Russia's MMK and NLMK mills will decrease their output by 10% due to the surging international iron ore price. Moreover, the EU may increase its import from Russia. The EU's Russian imports could top 2.217 million tons, up 417 thousand tons year on year. On top of all this, the largest Russian supplier, NLMK, plans to performance maintenance on its common slab continuous caster during the April-May period. This means that the mill's output will decrease from 300 thousand tons/month to 175 thousand tons/month. It also means that the company will stop exporting slab to Asian users during the period. Ukraine: The large iron ore and scrap exports of Ukraine have resulted in insufficient scrap supply in Ukraine's domestic market. Meanwhile, Ukraine's Ilyich Steel plans to overhaul its No.2 blast furnace in beginning in August. The renovation is expected to take two months In addition, demand for construction steel products in the CIS will recover again in spring. Judging from the above analysis, the billet/slab supply in Asian market will be tight if China's billet/slab exports decrease greatly due to the export rebate cancellation. (3) Estimation on steel price trend in Asia for 2nd Q, 05 Steel prices in Asian market will increase with moderate extent. Japan: Steelmakers have finished their negotiation on CR sheet export to China for Q2 2005. The transaction price reached $760/ton(C&F). Meanwhile, Nippon Steel Corporation (NSC) also decided to increase its sheet export price to Asia by $40-50/ton for Q2 delivery. For example, the company's HR sheet export price has reached $650/ton (FOB), up $50/ton against that of Q1. In addition, Japanese blast furnace producers are also planning to adjust their HR coil price upwards by 10'000 Yen from April 2005. The new price would reach 66'000 Yen. It is also known that suppliers may adjust their price upwards for the July-September 2005 period. Korea POSCO is planning to adjust its HR coil price to Japan upwards by 10'000 Yen in the second quarter. The price would be 8'000-10'000 Yen higher than that of Japanese blast furnace suppliers after the adjustment. The present HR coil price of Japanese blast furnaces is 56'000 Yen, while that of POSCO is 64'000-65'000 Yen. India Recently, the Indian Steel Minister claimed that the government has taken measures to ensure sufficient supply and stable steel prices in the domestic market. He also indicated that India's domestic steel price will decrease as 22 million additional tons of steel productivity gradually comes on line during the year. Vietnam The Vietnamese government has specified price floors and ceilings for construction steel products in order to avoid an overheated market situation. Based on the policy, the lowest steel ex-factory price is 7 million Vietnam dongs ($443.9), and the highest steel ex-factory price is 7.45 million Vietnam dongs ($472.4). Vietnam Steel Corp (VSC) informed dealers not to sell at prices below 8 million Vietnam dongs. Thailand The Thai government decided to adjust steel bar and frame prices upwards by 300 baht/ton due to expanding raw material prices. The new Commerce Minister pointed out that the construction industry will become active once again after the Spring Festival, which means the steel price should remain at a high level until mid 2005. (4) Analysis on China billet/slab export cost: In December 2004, China's large and medium sized enterprises' non-alloy billet manufacturing cost was 2306 Yuan/ton. At the same time, the average iron ore procurement price of large and medium sized enterprises was around 600Yuan/ton. In consideration of the high iron ore procurement price (800 Yuan/ton for example) for small and medium sized enterprises, the non-alloy common billet manufacturing cost for them should be over 2626Yuan/ton, up 320 Yuan/ton. Meanwhile, adding in the various costs in process and the value-added tax, the ex-factory price would be 3'225 Yuan/ton, equal to $390/ton (FOB). Before the cancellation of 13% export tax rebate, the direct domestic billet/slab export price was profitable as long as the price was over $345/ton based on manufacturing cost. This was the main reason for the over-heated common billet/slab export in 2004. At present, China's common billet/slab export quotation is near $400-420/ton. After the cancellation of export rebate, China's domestic enterprises will stop their export for a short while so that they can observe future market changes. If the common billet/slab export price continues going up in Asian areas and can remedy the loss after the cancellation of the rebate, or if China's domestic billet/slab price is lower than the export price, Chinese billet/slab exports will resume again. As for common slab, China's slab export is mainly a function of periodical oversupply due to technical renovations by domestic steelmakers. For example, Ansteel, Shagang, Nanyang Hanye, Xiangtan Steel, Beitai Steel, & Laiwu Steel have all formed their steelmaking capacity with relatively weaker rolling capacity. Flat steel product prices will remain high in the Asian market for Q2 2005, and the present export price is a little higher than the Chinese domestic market. Though the billet/slab export rebate cancellation will affect certain profit margins, the influence will be slight. What it comes down to is this: China mainly exports billet/slab to Asian areas, which will retain a high price level for billet/slab through at least the second quarter. Furthermore, CIS countries will not be able to fully meet market demand if China billet/slab retreats from Asian market. This means that Asian prices will rise even further. As for China's domestic market, shortly after China cancelled the export rebate, most domestic enterprises stopped exporting and adopted a wait-and-see attitude. This is likely to lead to an oversupply of billet/slab in the domestic market. In addition, Beijing's macro-adjustment in the steel industry as well as dropping steel prices will restrain the billet/slab sales price in China's domestic market. Along with widening price differences between China's domestic market and the Asian market, Chinese enterprises' billet/slab export enthusiasm will be stimulated again in the future.