Chinese steel exports may increase after the government raised tax rebates to cover the full amount of value-added tax (VAT) for exports of more steel products.
China will raise the export tax rebate for some carbon steel products including hot-rolled coil (HRC), wire rod and section steel to 13pc from 20 March, the ministry of finance said on its web site on 17 March. Coated steel and stainless steel products will also be subject to rebate increases. Exports are subject to a 13pc VAT tax, so the rebate will reimburse exporters the full amount. Fob prices include the VAT.
The higher rebates will reduce the cost of steel exports and increase competition with exports of other origins, just as the coronavirus outbreak has slowed Chinese steel exports and weighed on prices, market participants said.
Argus' fob export prices have fallen since the lunar new year began in late January. The Argus HRC index has fallen by $51/t to $450/t fob China and the Argus wire rod index has declined by $30/t to $454/t fob China since then.
China took similar action a year ago when it made rebar and square bar exports tax free, but strong domestic demand last year kept rebar on shore to prevent a surge in exports.
Steel exports have fallen because of higher domestic prices in recent years. The virus outbreak and extended lunar new year holiday reduced China's January-February steel exports by 27pc to 7.81mn t, the worst two-month start since 2012.
The coronavirus is reducing demand across global markets. China's steel inventories are at record levels, at least 20mn t higher than a year ago. The tax cuts could accelerate a supply glut in seaborne markets, market participants said.
The wire rod rebate increase from 10pc to 13pc is likely to reduce export prices by around $10/t, a north China mill said. The rebar rebate remains unchanged at 13pc but if wire rod prices start to fall, rebar prices could follow, a Singaporean buyer said.
HRC prices will have room to fall by around $15/t after its rebate grew from 10pc to 13pc, several Chinese mills and traders said.
An east China-based mill cut its offer for HRC by $10/t this morning. Other mills do not want to cut offers too quickly to avoid upsetting customers that just made purchases. A north China-based mill exporter may consider cutting offers for June shipment because customers that already placed orders for April and May would feel it is unfair if it cut prices immediately.
"We are worrying about buyers coming to ask for compensation for previous deals given their current weak demand," a Shanghai-based trader said. Market reaction has been mixed before. When China removed the tax rebate for boron-added products, the mill lost tens of millions of dollars. The second time the HRC tax rebate was lifted from 9pc to 10pc, there was little market reaction because the change was so small, the mill said.
Other coil producers are holding back amid uncertainty in the domestic market.
China's domestic price trend may have greater impact than the rebate, as was seen with rebar over the past year, market participants said. China's construction steel market is recovering, so if domestic prices for rebar and wire rod continue to move higher, it will offset downward pressure and possibly bolster export prices higher, an analyst said.
Weakness from overseas markets could also erode the strength in China to weigh on export prices.
Tokyo Steel on 17 March lowered ex-works prices of steel products by $47-84/t for April shipments, in line with falling scrap prices, weak demand and cheaper imports of Chinese steel, an east China mill official said.
Japanese steel mills are aggressively selling across the global markets, pressuring Chinese mill offers lower. The spread between Chinese and Japanese offers for SAE1006 grade coils in Vietnam shrank from $50-75/t in early and mid-February to zero in early March. The spread between Chinese and South Korean offers also decreased from $45/t to zero during the same period, according to Argu's HRC Asean cfr Vietnam differentials.
