China Moves to Remove Export Tax Rebates (or is it?)

There have been a number of articles written recently regarding the move by the Chinese government to remove some of the tax incentives in the form of rebates to the Chinese steel producers who export certain steel products. Any move to remove export tax rebates on steel is seen as a positive by the rest of the world which is dealing with over-capacity issues. With China producing half of the world’s steel, all eyes are on China to make moves to reduce steel-making capacity and ultimately slow exports.

One of the main products affecting steel prices around the world (as well as scrap prices) are “billets.” Billets are produced by EAF or induction furnace steel mills in China. The billets are semi-finished steels used in the production of long products (rebar, wire, SBQ, etc.), much like a slab is used to produce flat rolled or sheet products.

The Chinese sell billets to Turkish steel mills (and others around the world) at low prices. In the process, the Turkish mills either don’t buy scrap or push the price of scrap down in order to compete with the billet prices from China. The U.S. is one of the major suppliers of scrap to Turkey. If prices are pushed lower or, if sales are not made, then there is a ripple effect and ferrous scrap prices are forced lower in the U.S. domestic markets.

The interesting little tidbit of knowledge that makes this story much more interesting is the Chinese steel mills do not receive special export tax rebates for billets. But they do provide a rebate for “alloy steel bars.” One of our trading sources located in Asia is well aware of how the Chinese government and steel mills work. He has provided SMU with insights into the workings of both as it relates to tax rebates and those mills who are cheating the system by selling billets as alloy steel bars… Here is what he had to say:

“As promised, here is the low down on this Tax issue with the Government Tax Bureau going after the Steel Mills…

“Before going into this issue, when a Government as China has to send the Tax man to the Mill’s front door to Audit them for Tax evasion, you know Millions or Billions of Dollars are at stake and no more Blind Eyes being turned, plus the Government must be hurting for those Tax Revenues.

“Currently, the Government is chasing the Mills that only produce Billets, and 99% of these mills are EAF and/or Induction Furnace mills with no other products downstream [such] as Wire Rods, Debars, Angles, etc… The reason for this is that these mills, for example, are allowed RMB 7.0 million (a random number) per month in Sales against issuance of Government Tax Invoices. This is point (A).

“Why is the Government focusing on these mills – Because these mills do not have secondary production and only Billet production, they can only sell their Billets as “PRIME STEEL BILLETS” which is not applicable for any Tax Rebate upon export as the Commodity name must be “Alloy Steel Billets or Prime Alloy Steel Billets or Alloy Steel Bars”. This is Point (B).

“So, these mills are selling their Billets to a domestic Trading company which can Invoice the Billets as Alloy Steel Billets/Bars etc… and when exported the domestic Trading company can apply for the Tax Rebate and it is shared with the Supplying mill. This is Point (C).

“Above you will note that I gave you a random number of the monthly Government Tax Invoices these mills can issue, right? Well, they have been exceeding these amount in the Millions of RMB by selling to domestic traders, not paying on the exceeded Invoice amounts, plus taking part of the Tax Rebate from the secondary traders. This is Point (D).

“Point (E), the Governments wants to shutdown these EAF and Induction furnace mills due to heavy pollution as well as by shutting down the domestic trading houses who take these billets and change the commodity name and avoid paying taxes while reaping the tax rebates, they close down the channels of these EAF and Induction furnace mills while at the same time forcing these mills to close down.

“Now…. Why is the Government not going after the Integrated mills which also produce and export Billets?? It is because they have secondary production as Wire Rods, Bars, Debars, etc.. and they can issue their Invoices as Prime Alloy Steel Billets or Bars etc.. to get the Tax Rebate. Plus, the Government cannot with certainty say that the Billets are NOT Alloy Steel Bars (Even though they are Billets John). The mills are saying the Billets contain Cr 0.35% min. and under the Tariff code, they are Alloy Bars, and they contend that the Billets have been Rolled once and considered a BAR under the Tariff code, so unless the Customs at the Portside actually check the Billets, there is nothing much the Government can do as the Customs in the ports cannot check every single cargo of Billets entering the port for export. No laboratory, no experienced people, etc.., they can only trust the Documentation for clearance at the ports.

“There is approximately 20% of Billet exports being made by EAF and Induction furnace mills John and even though this is about 2 million tons per year, it calculates to ONE DAY’S Production of Steel in China today, but it is a start.”

SMU Note: In other words, the Chinese government has the world all giddy with the prospect of ending tax rebates in order to show they are doing something to get the excesses of steel off the world market. When you drill down deeper (as our trading sources has done above) you find that the impact, a mere 2 million tons, is but a drop in the bucket and will have no real impact on reducing excess steel off the world market.