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Tax rebate positive, but real impact minimal
By Julian Zhu and Honghe Xie |
August 6, 2012, Monday
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Print Edition
Print Edition
THE Shanghai Securities News reported last Tuesday that China may revive the value-added tax (VAT) rebate scheme for domestically produced high-end steel used for export purpose.
Under such a scheme, selected steel producers will get a full rebate of the 17 percent VAT when selling certain types of steel for export-only products at prices exclusive of VAT.
The scheme was first introduced in 1998 to encourage the greater use of domestic steel products so that it can replace imported materials; however, this was suspended in 2005. In our view, the steel products that are likely targeted for the currently proposed plan could include silicon steel and shipbuilding steel.
Limited influence
We expect such scheme (pending official confirmation) to have minimal impact on alleviating the persistent overcapacity in China's steel industry because: 1) the likely targeted steel products (silicon and shipbuilding steel) represents less than 5 percent of China's total steel capacity, and 2) most steel producers are unlikely to benefit as only a few top players are producing such high-end steel.
Furthermore, the potential demand uplift from such a scheme, if implemented, remains uncertain as steel-related export has been weakening and could also trigger further trade disputes by steel producers outside China.
We remain cautious on China's steel sector as we expect margins to drop further in the third quarter from the second quarter, after a 20 percent steel-price plummet over the past two weeks. Our recent visit to steel mills in Hebei Province suggests steel producers may be seeing even deeper losses in July.
Despite the gradual rebound in demand (though still far below normal levels), continued overproduction could cap any potential rebound in steel prices. We do not believe the announced production cuts since July have been implemented given the stubbornly high daily output in July (1.993 metric tons per day in middle July vs. the record 2.05 metric tons per day in early May) and rising inventory at steel mills (aggregate inventory of top 76 mills in mid-July reached a February record high of 12.45 metric tons).
The article was adapted from a research note issued on July 31. The opinions are their own.
Under such a scheme, selected steel producers will get a full rebate of the 17 percent VAT when selling certain types of steel for export-only products at prices exclusive of VAT.
The scheme was first introduced in 1998 to encourage the greater use of domestic steel products so that it can replace imported materials; however, this was suspended in 2005. In our view, the steel products that are likely targeted for the currently proposed plan could include silicon steel and shipbuilding steel.
Limited influence
We expect such scheme (pending official confirmation) to have minimal impact on alleviating the persistent overcapacity in China's steel industry because: 1) the likely targeted steel products (silicon and shipbuilding steel) represents less than 5 percent of China's total steel capacity, and 2) most steel producers are unlikely to benefit as only a few top players are producing such high-end steel.
Furthermore, the potential demand uplift from such a scheme, if implemented, remains uncertain as steel-related export has been weakening and could also trigger further trade disputes by steel producers outside China.
We remain cautious on China's steel sector as we expect margins to drop further in the third quarter from the second quarter, after a 20 percent steel-price plummet over the past two weeks. Our recent visit to steel mills in Hebei Province suggests steel producers may be seeing even deeper losses in July.
Despite the gradual rebound in demand (though still far below normal levels), continued overproduction could cap any potential rebound in steel prices. We do not believe the announced production cuts since July have been implemented given the stubbornly high daily output in July (1.993 metric tons per day in middle July vs. the record 2.05 metric tons per day in early May) and rising inventory at steel mills (aggregate inventory of top 76 mills in mid-July reached a February record high of 12.45 metric tons).
The article was adapted from a research note issued on July 31. The opinions are their own.
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