News reports about inspections of steel cargoes for exports at a number of large Chinese ports have emerged this week and market sources are widely discussing the possibility of the limitation of non-VAT trading from China in the near future. Though this should theoretically push offer prices from China up and impact other suppliers, especially in the HRC and longs segments, for now low prices from China still exist. Exporters are taking their time and do not want to scare buyers.
Inspections of cargoes at Chinese ports
According to numerous reports from mills and traders in China, Chinese customs authorities have started investigation on non-VAT business and, though late last year reports on the issue were also heard, the situation now looks more serious. “The first warnings were received by HRC exporters from the inspectors. As a result, many non-VAT offers have disappeared from the market,” a Chinese source said. There are reports of inspections at the ports of Qingdao, Jingtang and Tianjin, and that shipments of “suspected non-VAT contracts” totaling at least 150,000 mt have been delayed.
Non-VAT trading has been very popular in the HRC market, though in smaller volumes, but some sellers have also been exporting rebar and wire rod this way. As SteelOrbis reported earlier, non-VAT trading started to be the new normal in early 2023 and has gained strength up to the present. In particular, non-VAT trading means that traders buy steel, HRC in particular, from mills in the Chinese currency and then sell invoices to companies that need to offset taxes, according to Chinese sources. The difference between non-VAT traders’ prices and mills’ prices can range from $10-20/mt up to six percent depending on the product and the market.
Will non-VAT trading stop?
The market is divided on whether non-VAT trading will stop due to the recent inspections. Most market participants agree that non-VAT sales volumes will be limited, but it is hard to believe that they will be fully stopped, and the action that the government will choose to adopt is also unclear. “It [control of non-VAT trading] will happen soon one way or another. There have been rumors for a while. The government does not allow it, but they were pretending not to see it,” a trader, selling Chinese HRC to Turkey, commented. But he also added that, even if non-VAT offers from China disappear at some time, “Turkey will still book from China as they are the cheapest.”
Some traders also believe that a full ban on non-VAT trading will not be so positive for China itself. “Exports have been key to maintaining some supply-demand balance in the Chinese market and not only for steel but also for other products (e.g., electric vehicles). Also, exports will be key for China to achieve its GDP growth in 2024… Of course, non-VAT exports result in losses of VAT and thus the government may want to block that. But banning non-VAT exports means not receiving VAT at all from some markets - as those exports probably won't happen,” an international trader said.
Most Chinese exporters polled by SteelOrbis believe that non-VAT shipments will continue until the policy on penalties is published (unlikely until mid-May) and, as a result, the cancelations of previously signed contracts are doubtful. “These traders are also observing the country's actions and trying to ship the goods out as quickly as possible during this final stage,” a mill commented.
Impact on prices differs widely
Though some traders have already voiced an increase in offers for HRC and wire rod from $10/mt to $40/mt lately, in a number of important markets non-VAT prices from China are still available. In particular, in the Vietnamese HRC market, offers for Q235 and SS400 HRC have been heard at $540-542/mt CFR for June shipment, up by only $2/mt week on week. Market sources believe that the Vietnamese market, where Chinese exporters have been selling good volumes in the past few months, is very price-sensitive and that much higher offers will give opportunities to other sellers, like Japan and India. In particular, the latest sale of ex-Japan HRC to Vietnam was just $3/mt above ex-China SAE1008 offers, while usually the difference is over $10/mt.
However, in the Middle East market, there has been a more significant increase in offer prices. For instance, ex-China SS400 HRC offers have increased by $10-30/mt in the UAE over the past week to $560-585/mt CFR for May and June shipments, while in Turkey Chinese prices are voiced from $575/mt CFR to $590/mt CFR, rising by at least $10-15/mt in one week, and much above the deals signed at $555-560/mt CFR in the previous round of bookings.
Also, there have been reports in the market, that at least one large Chinese trader has increased its offers for wire rod by $40/mt. Nevertheless, some traders view the Chinese market as unstable and are still offering at $520-530/mt CFR to the Philippines, Vietnam and Thailand. Market sources believe that the latest offers are still non-VAT as even most second-tier mills in China are asking for $530-540/mt FOB.
How important is non-VAT trading for Chinese exports?
The importance of non-VAT trading especially in the HRC segment increased significantly in 2023. A few large Chinese traders estimate that non-VAT sales accounted for between 50 percent to over 60 percent of total HRC exports last year. China’s hot rolled steel product exports totaled 59.63 million mt in 2023, up 40.6 percent or 17 million mt year on year, according to the Chinese customs authorities. At the same time, in the Turkish market, non-VAT Chinese exports claimed around 30-40 percent of total HRC imports. The share in the Vietnamese market was much bigger and was estimated by some sources at 70-80 percent.
That is why the loss of such a large volume of exports from China will significantly impact the market and may not be desired by the Chinese government. As reported in late 2023, this year local steel consumption in China is expected to fall by 1.7 percent after decreasing by 3.3 percent in 2023, according to China’s Metallurgical Industry Planning and Research Institute (MPI). In this context, with limited space to redirect volumes to the domestic market, the Chinese market may incur losses and significant production cuts would be needed, unlike those seen last year.