While the Chinese government imposes an export tax on a total of 83 types of steel products, unconfirmed rumors have surfaced of a reduction in the value added tax (VAT) rebate for pipe and tube, from the current 13 percent to a possible five percent or less. This change in the VAT rebate doesn't appear to be a sure thing, but what is certain is the Chinese government's ability to instantly change important export regulations without giving much prior notice.
The Ministry of Finance announced that as of June 1 this year, in order to further reduce exports of high energy consuming and high pollution steel products, an export tax of between five percent and 10 percent will be added to various rolled steel products including wire, hot rolled plate, sections, rebar, and many of the other steel products for which the VAT rebate was abolished in April of this year. Tubing and pipe, however, are not included on the list, as those products were able to maintain the hefty 13 percent VAT rebate. The high VAT rebate is an additional incentive for the production and exportation of pipe and tubing, which are considered by the Chinese government as downstream products.
Now, with the implementation of the Chinese export tax imminent, rumors are circulating about the lifespan of the 13 percent VAT rebate for tubing. It is all speculation as of now, but market players are hearing talk that the VAT rebate for tubing may be reduced to five percent or less. Some sources say it may not happen until 2008, while others believe it could happen as early as June 1 to follow along with the newly imposed export tax. At this point in time, market players are waiting anxiously to hear something more concrete, while most Chinese tube producers are holding back their offers.
All of these rumors have pushed the Chinese import pricing trend up, as it is expected that offering prices will increase if the Chinese mills have to give up a large portion of their rebate. The current state of the hollow sections market in the US is by no means great, which will lead to difficulty for the Chinese mills to pass on the full cost of their lost rebate, if the rebate were to decrease. If the rebate is reduced, mills will most likely have to absorb some of the cost, as a large increase in offering prices is not likely to be accepted by the US market.
Although the pricing trend is up, Chinese offering prices have not changed yet and are still in the range reported two weeks ago by SteelOrbis. Offers are ranging from $31.50 cwt. to $33.00 cwt. ($694 /mt to $728 /mt or $630 /nt to $660 /nt) FOB West Coast, approximately $0.50 cwt. ($11 /mt or $10 /nt) higher on the Gulf Coast. East Coast discharge is roughly another $0.50 cwt. ($11 /mt or $10 nt) higher than the Gulf Coast.
Even though there is a big gap between the Chinese and US domestic prices, Chinese shipments have been less than reliable, and many Chinese origin tubes show significant quality problems such as straightness, weld and steel integrity. It has been reported that serious quality claims are surfacing on the West Coast, with many receivers and involving multiple mills.
In Turkey, flat rolled prices are relatively stable, keeping the pricing trend for hollow sections neutral. Turkish hollow section offers are still ranging from $37.00 cwt. to $38.50 cwt. ($816 /mt to $849 /mt or $740 /nt to $770 /nt) for FOB, loaded truck, US Gulf Coast ports, though there are not too many takers.
The overall state of the tubing market in the US is just okay. Demand is not very strong, mills are not booked to capacity, and service center inventories are on the high side. Hollow section prices have remained stable since our last report but could quite possibly come down as soon as the flat rolled market isn't doing as well as was expected, and flat rolled prices may be even be headed down slightly. With the cost of raw materials decreasing, and demand being just mediocre, hollow sections prices may fall slightly as well in the upcoming months.
For now, domestic prices are ranging from $41.00 cwt. to $43.00 cwt. ($904 /mt to $947 /mt or $820 /nt to $860 /nt) for A500 grade A and grade B hollow sections up to 6" in the Midwest region. Midwest mills are more aggressive in the West Coast market and sell there at levels close to their home market prices by absorbing the railing cost.