FEATURE: Why China’s domestic, export prices for billet are diverging

The gap between China’s domestic and export prices for billet has widened in recent weeks, and the reason behind it seems to be very simple: we are now talking about two different products.

The price of the semi-finished product in China’s Tangshan city was 2,110 yuan ($316) per tonne including VAT on both September 13 and 14, before the start of the Mid-Autumn Festival break.

But the lowest export offer prices for the product last week were $330-335 per tonne fob – at least $15-20 per tonne higher in US-dollar terms.

Until a few weeks ago, this gap used to be only around $5 per tonne.

On the last day of August, for instance, billet traded at 2,280 yuan per tonne in Tangshan – equivalent to $341 per tonne then – while the 150mm Q235 product was being offered around $345 per tonne fob.

On July 19, Tangshan’s billet price was 2,000 yuan per tonne – equivalent to $299 per tonne – while most export offers were at $305 per tonne fob.

A month earlier, on June 14, domestic prices in China were around 1,850 yuan – $281 per tonne – while the lowest fob levels were around $285 per tonne.

So what is behind the widening spread?

According to several market participants in China and other parts of Asia, the main reason for this bigger gap is the investigation launched by the country’s State Administration of Taxation earlier this year into export tax rebates for steel products, including billet.

Though the probe only came to light in June, some companies had already been under investigations since March or April and a number of them were still waiting to get their tax rebates for billet exports transacted more than six months earlier.

In the past few years, Chinese companies had been declaring billet as alloy square bar in order to avoid an export duty on semi-finished carbon steel and to claim an export tax rebate on value-added products.

Several of them even used to take the risk of exporting part of their billet shipments, or even most of them, devoid of any alloy.

But this is apparently no longer the case.

In other words, the billet being traded in Tangshan’s domestic market is the “real”, non-alloy steel product, while those being exported are mainly alloy steel square bars.

Here are what several market participants say about this latest development:

“I personally think the key reason [for the widening spread] is the tax rebate investigation in China. That and a recent trend of integrated steelmakers exporting directly instead of using trading companies [are among the factors]. This means it’s not easy to get non-alloy [steel] cargoes anymore. So overseas buyers have to accept square bars with [the added] chromium, vanadium or titanium, otherwise nobody dares to handle these cargoes.

“You can even see that prices have dropped sharply in China’s domestic market in recent weeks, but export offer prices are still high. We traders are all making offers based on ‘real’ square bar prices, and guarantee that the whole cargo comprises alloy steel. If things were still being handled like before, offer prices would be $315-320 per tonne fob, but now we don’t worry about prices anymore; only about claiming back the tax rebates after shipment.”

– A Chinese trader who regularly deals in billet exports

“The price gap is bigger because all the billet cargoes consist of chromium-added steel now. Before, many of these cargoes didn’t have chromium. There is a cost of up to 80 yuan ($12) per tonne to add chromium. Whether a cargo is rolled or not, it’s difficult to distinguish, but [the existence of] chromium can be tested.”
– A Hong Kong-based trader

“For the moment, as a ‘side effect’ of the tax crackdown, there is indeed only ‘real square bar’ available for export. So billets stay in China.”
– A Singapore-based trader

“I think it has to do with the difficulty of getting the export tax rebate. Some mills really do the additional rolling process and add alloy into 100% of the shipped cargo to make sure that they will get the export rebates, so there are extra costs.”
– A Thailand-based trader

“I believe the reason is because the tax office has been diligently investigating Tangshan mills concerning allegations of fraud related to the tax rebates. So I guess exporters are being exposed to more risks by buying from Tangshan mills, hence the need for them to sell at higher prices.”
– A trader in the Philippines

“Some Chinese mills may be finding it more difficult to do export business [of billet] at the moment, so the increase in the gap is normal. Ironically, due to the uncertainties of the last few months, some traders had lost money when the mills failed to deliver so now they prefer to stay away from buying billet from China.

“One important thing to add is that it is the general view of many market participants that this loophole involving alloy steel square bar rebates should be closed by the Chinese government. If China wants to allow local mills to export semi-finished products, then they should close the rebate loophole and remove the export tax. Their local mills can compete in the international market fairly.

“Now, if China does not want to allow local mills to export semi-finished product, then they should keep the export tax and also close the rebate loophole. Buyers will then look elsewhere, but at least the game is clear to everybody.”

– A billet importer in Southeast Asia
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