Chinese authorities announced last week that, from May 1, import duties for metallics and semi-finished steel would be removed and that export duties for raw materials such as ferro-silicon, ferro-chrome and high-purity pig iron would be set at 15-25%.
At the same time, Beijing also removed export tax rebates for major steel products: hot-rolled coil, rebar, wire rod, hot-rolled and cold-rolled sheet, plate, H-beam and stainless steel.
‘Definite boost’ to prices
The changes are music to the ears of steelmakers around the world, especially since they continue to power through a second quarter marked by historically high prices and marvelous profit margins for steel products.
They have been able to price in the rebate cuts even before the announcement, causing prices to increase continually in the first four months of the year. Take for example, hot-rolled coil exports from China, which have increased by 44% between January 20 and April 30.
And the price increases are likely to continue, because of the idled capacity which has not been restarted since 2020 when the Covid-19 pandemic unfolded, as well as surging demand from key markets such as China, Europe and the United States.
The removal of China’s export tax rebates for steel products has not discouraged Chinese exports yet, an industry analyst in India told Fastmarkets.
"This is because export [price] realizations are much higher," the analyst said.
Flat steel prices in Europe are so high; importers are paying 25% anti-dumping import duties to bring in Chinese cold-rolled coil because idled steelmaking facilities in the region have not been restarted to alleviate the supply tightness in the flat steel segment.
"But when prices fall, Asian steelmakers outside of China, including those in India, will benefit and increase their share in the export markets,” she said.
With China’s five-day Labor Day public holiday coming to an end on Wednesday May 5, all eyes are on the country to see how the market moves on Thursday. Most market participants are expecting spot prices to continue seeing upward support for prices in the near term.
An optimistic trader who deals in HRC in Asia feels that price trends will continue to be bullish until the end of the year.
Lower steelmaking costs boost for margins
The removal of import taxes on steelmaking raw materials is a clear sign of China boosting support for cleaner steelmaking, making the imports of metallics such as hot briquetted iron (HBI) and pig iron cheaper, and reducing the country's reliance on costly iron ore and coking coal imports.
China’s new tax regime also suggests that the country is aiming to keep other steelmaking raw materials such as ferro-chrome and ferro-silicon inside the country, instead of exporting them to buyers around the world. This will increase the supply of raw materials for Chinese steelmakers and alleviate one of their major pains – the cost of procuring these raw materials.
The raw material tax policies are more worrying for low-grade iron ore producers, which are potentially already seeing tell-tale signs of what may happen to discounts for low-grade iron ore fines in the future.
Discounts for low-grade fines have hit lows of more than $15 per tonne this month, amid an environment of higher demand for high-grade fines.
This can be seen in the spread between 62% and 65% Fe iron ore prices, which hit a historical high of $35.08 per tonne in April this year.
It is also advantageous for high-grade direct charge iron ore pellet producers, who have seen iron ore pellet prices experience strong gains in recent months. At the time of writing, prices for direct charge iron ore pellets have risen to just above $262 per tonne cfr Qingdao.
These increases have been attributed to a higher consumption of pellets among steelmakers that operate blast furnaces (BFs), which came at the expense of iron ore lump. As such, increases in lump premiums have been more muted.
But a key concern is whether there is sufficient alternative feedstock for China - the world’s largest steel-producing country - if its demand for metallics and ferrous scrap suddenly surges.
This may very well see the new capacity for metallics and ferrous scrap being started up in various countries to get a slice of China’s pie.
"Well, if there's an opportunity to invest in HBI or pig iron capacity, why not?" a trader of semi-finished steel in Southeast Asia told Fastmarkets.
The removal of taxes on billet also levels the playing field for producers of the semi-finished product around the world.
Billet producers in the Commonwealth of Independent States and the Middle East will become more competitive. This is because their products will no longer face a 2% import duty when shipped to China - a privilege that producers in Southeast Asia have enjoyed before May 1.
"Southeast Asian producers will have to acknowledge that they are no longer the most competitive in terms of cost, and will have to follow the lead of Russian mills," the semi-finished steel trader said.
Potential supply gap
The policy change in China also marks a turning point for the world’s steel supply.
If Chinese steel supply falls, who will be able to fill that gap?
The biggest beneficiaries will be India and Russia, market sources say.
Steel producers in Japan, South Korea, Taiwan, Indonesia, Vietnam and Malaysia will also benefit from such a drop in Chinese cargoes in the seaborne market.
Electric-arc furnace operators in Vietnam and newer BF operators in the country, as well as Malaysia and Indonesia, all stand to gain since they are already shipping billet to China.
It will take time for these newer steelmakers in Southeast Asia to catch up to their counterparts in Japan, South Korea and Taiwan with regard to the quality of the flat steel that they produce, however.
But China still has some skin left in the game, especially if prices outside the country are extremely high.
And if the world is short of steel, buyers may even petition to have the current trade barriers against Chinese steel removed so that they can secure more supply from China.
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China's new tax regime for ferrous raw materials and steel exports will kick off a new era for the steel sector, one in which demand and supply will become more balanced and the country cuts its dependency on iron ore at a faster pace.