Hit by the dip in steel exports in 2009, Chinese government was contemplating various steps to boost exports and finally announced change in VAT rebate officially last week on exports wef June 1st 2009. Understand that major steel makers and other players knew it form June1st 2009.
9% rebate component works out to about USD 40 per tonne to USD 50 per tonne on an average and should have encouraged Chinese steel mills to regain lost glory. But the scenario appears to be different this time, although the picture remains a bit hazy.
During our discussion with industry insiders and analysts in China, we understand that following factors would still hinder steel exports in coming times
1. Surge in domestic realization
Chinese domestic prices have surged by about 6% to 12% for all major categories at Shanghai, except plates, during last 30-35 days, increasing realization of steel mills in domestic sales.
2. High cost element
The situation with Chinese mills this time is quite different than that in past, when domestic iron ore and coke prices were low. But this time Chinese coke prices are higher than many other origins and as such the iron ore prices are under flux. Thus Chinese mills are not having the cost advantage as enjoyed by them in past, which supported them in very competitive export pricing.
3. Trade issues
With domestic mills badly hit in almost all the countries, trade issues have taken front seat. As a result many countries are contemplating enforcing trade barriers on steel imports, or could do so on import surge. This has made the situation quite sensitive for Chinese mills.
The fact of the matter is that except for India, steel mills in almost all other countries are operating at 40% to 50% capacity resulting in massive layoffs prompting governments to undertake measures to protect domestic industry.
4. Competition from Black Sea and others
During last export surge cycle, not only the demand was tremendous, the traditional suppliers from Black Sea were on a roll with very high prices giving room to Chinese mills to capture their markets. But now the demand is very limited thus Black Sea suppliers may not allow Chinese invasion by lowering their prices as they have exported at much lower levels than prevailing at present
5. Sluggish global demand
Low global demand for steel products is the biggest factor, which would hinder Chinese attempts for increasing exports. And with the current global economic scenario, no immediate remedy for increasing steel demand is visible. Thus, industry experts thus feel that the Chinese move of VAT rebate on steel exports is not likely to cut ice this time in a big way although it would help them to increase sales to nearby markets in SEA and Japan etc.