SOLID EXPORTS: Hebei Iron and Steel Group survived the market depression in 2009 by further integrating production of all its branches (WANG MIN)

China will scrap tax rebates on exports of 48 steel products starting on July 15 in a move to rev up economic growth pattern and economic reform.

The decision disappointed local steel mills hoping for more government support as they face potentially calamitous margin pressures in the third quarter as well as declining exports as a result of the appreciating renminbi.

China raised steel export rebates to 9 percent in June 2009. The rebate removal a year later will be equal to a cost increase of 9 percent on steel mills.

The government will also take action against rebates on exports of high-polluting and energy-consuming industries in the coming years, said Zhang Yansheng, Director of the Institute of Foreign Trade of the National Development and Reform Commission.

Pollution

The iron and steel industry, with severe overcapacity and outdated products and technologies, is one of China's major energy consumers and the largest polluter. The restructuring of this industry commenced several years ago, and the recent export rebate removal is one step of the whole process. The measure could have been introduced much earlier had it not been for the financial crisis in 2008, Zhang said.

But now, the timing of the rebate removal is just right—exports of steel products rebounded this year, with 18 million tons shipped abroad between January and May, up 132.7 percent year on year.

The adjustments will hopefully help the country attain its emission reduction goal for the year. China pledged to cut energy use per unit of GDP by 20 percent by the end of 2010 from 2005 levels, but only reduced consumption by 14.38 percent between 2006 and 2009. In the first quarter of 2010, energy use per unit of GDP even increased 3.2 percent, making it a formidable target to fulfill in the remaining five months of this year.

A May notice from the State Council on emission targets from 2006-10 said that 30 million tons of iron-refining capacity and 8.25 million tons of steel-refining capacity still had to be shut down in order to achieve the five-year target.

As exports rebound against weak domestic demand, discouraging exports by increasing the costs of iron and steel products has become one of the government's solutions to wiping away the industry's overcapacity.

"Apparently, it's a signal indicating the country has prioritized emission reduction and economic reform in the coming years," said Zhang Lin, an analyst with Lange Steel Information Research Center, China's leading steel information service provider.

Prices

The rebate removal policy was introduced with surprising speed and only added insult to injury for steel mills already expecting to post losses in the third quarter, said Mei Xinyu, a researcher with the Institute of International Economics and Trade of the Ministry of Commerce. Steel mills at large are facing difficult times—while a string of measures aimed to cool off the red-hot housing market has cut domestic demand for steel products since April, the rebate removal will force some of them to cut exports.

The removal will squeeze producers' margins, with large steel exporters bearing the brunt. Unlike previous export rebate adjustments, the policy this time affects up to 40 percent of steel exports, and exporters will earn approximately 300 yuan ($44) less for each ton of steel. The whole industry could witness a decrease of 3 billion yuan ($441 million) in revenue if the country's exports remain at 48 million tons this year.

"It's likely steel plants will cut production in the second half of this year," said Wan Wei, a researcher with Aijian Securities Co. Ltd.