Chinese steel export tax: Lessons to be learnt

Updated: May 28 2007, 06:31am hrs
At a time when the seasonal downturn has just started in the world of steel, the export tax in China will help steel prices hold on to some extent. The tax will widen the gap between the Chinese home and the world markets prices as the Chinese market comes under supply pressure.

This will be good for the countrys steel intensive industries and construction, reduce inflationary pressure and help the country manage her energy and minerals situations better.

There were several ideas about why the Chinese government run after steel exports. They first reduced export incentives to almost nothing, then they imposed some sort of control through licensing and now they have brought several important products under the purview of export tax apart from raising the rates for those which had already been covered by that.

The move to bring in licensing could be to favour a select few major steel producers with significant exposure in the world market by way of reducing competition among the Chinese players on the hand in the export market and by helping the world prices gain strength from reduced supply from their own smaller and inefficient plants. But, the imposition of the export tax shows that the Chinese government has more to it.

Immediately, they want steel prices down in home market to support the export based steel user industries. They also want their infrastructure development costs low. They are not keen to see steel industrys developments to be based on the export opportunities.

Their own coal mines are in a terrible state causing pollution and accidents. Much of it has been caused by the steel industrys demand for it. The negative implications of high steel prices are evident globally. Several countries are contemplating actions either to slap export tax or other restrictions to ensure that steel is encouraged to be produced largely for the home market.

There is clear economic loss in exporting steel when imports are to fill in the domestic market. Excessive and avoidable ocean transportation has raised energy demand. China has not put any restriction on imports of steel despite the fact that their imports are still very high.

The country seems to be having a clear long term perspective on energy, minerals and the environment. As the Chinese master technology, their products are getting qualitatively better and opportunities for their industrial growth have never reduced. If a country can export 50 million tonne of steel importing all the iron ore paying huge prices, there is no question about their competence.

They can continue to grow and take care of all the incremental global production by raising their home capacity if they want. The Chinese steel makers would have done that, turning most us into pure iron ore traders.

The government, however, has a different view, a longer term perspective on industrial development and a vision to get rid of the mess that has already been created by dirty manufacturing and mining in the country.

(The author is an independent steel industry strategy analyst )