Two news items are likely to provide supportive press as well as Street conclusions – rumors the past week of a likely “export tax rebate elimination” as well as an overnight report that Beijing came out with a new plan to eliminate “backwards and polluting” iron and steelmaking capacity.
While both of these will likely be interpreted as good news for global steelmakers, we have a more skeptical view; Beijing has announced “new capacity eliminations” twice/year for the last half-dozen years – so far Beijing has been completely impotent in trying to close these mills and address overcapacity.
Similarly, the export tax rebate rumors address an adjustment in the spreads – not an elimination – the net result will likely actually increase the rebate for value-added steels while reducing the rebate for commodity steels.
Overnight the Chinese steel website mysteel.net carried a story of a new plan for the elimination of capacity in 6 key Chinese industries including ironmaking, steelmaking, aluminum smelting and cement. Announcements of planned obsolescence of older, smaller, higher costs steelmaking facilities have generally come once or twice/year for the past half-dozen years and while well-intentioned, have typically not had any teeth – there’s been very little rationalization of high cost iron and steel capacity in China primarily because whenever the steel market weakens in China – as it is currently – the government generally bails out the money-losing mills with increased subsidies in other forms.
Likewise continued reports of what’s being called “export tax rebate reductions” would seemingly be good news to the west, and potentially serve to similarly hasten closures by reducing the subsidy to export – again this seems well-intentioned however, from the information we have, it would appear that while the VAT rebate on commodity hot-rolled steel would be eliminated, the rebate on the value-added steels would rise actually from 4% to 9% - net – VAT rebates are based on the spread between the raw material cost and the final product price – something that at times is a bit elusive to our sales-tax oriented thinking.
So while both of these moves will like get both press and Street attention as good news for the West, we’ll take both moves with a very large grain of salt.
Michelle Galanter Applebaum
Disclosure: No positions