China’s Steel Export Tax Rebate vs its Steel Export to ASEAN-6

Posted on 02 June 2020

According to worldsteel, The Ministry of Finance increased the export tax (VAT) rebate on some steel products, with effect from 20 March 2020. The adjustment of the tax rebate affects a total of 122 HS codes, including stainless steel, coated steel, high alloy steel, seamless pipes, welded pipes and some steel-containing goods, e.g. cast steels and springs for motor vehicles and trains. The tax rebate was raised to 13% from 9-10%. The products covered are not the major export items, for historical statistics. China’s most common exported items were standard grades of HRC, CRC, plates and long products and the tax rebate remains zero.  
 
Having looked at what happened in the past, China has become a net exporter for steel since 2005. The share of steel export to its crude steel output boosted to a significantly high level in 2007, when the government announced a 15% export duty on the export of semis in June 2007 and the duty was further raised to 25% in January 2008. As a result, China’s export of semis to ASEAN-6 virtually ceased since 2008. 
 
Share of China’s steel export to ASEAN-6 countries continued to increase to above 15% since 2002 although total steel export in China was still low. Share of China’s steel export to the region remained significant to above 20% in 2012 and continued to increase over years. It was widely reported that the Chinese steel mills inserted a miniscule amount of boron into their steel123, high enough just to technically qualify the product as alloy steel. Doing so will allow the mills to get VAT rebates, 9-13% for bars and wire rods as an example, for export purposes. Such steel is used in the ASEAN construction sector which do not need alloy steel. A key point to note is the domestic Chinese construction projects DO NOT use boron alloyed steel, until today.
 
After much worldwide protest, the  Chinese government removed VAT rebates of 9-13% on the boron-added steel products, including 7225.4091 of hot rolled plate and sheet, 7226.9191 of hot rolled narrow strip, 7227.9010 of wire rod and 7228.3010 of bar, with effect from 1 January 20154. 
 
However, it appeared that the share of China’s steel export continued to increase and reach as high as the share of 35% in 2016. ASEAN Iron and Steel Council found that China’s export of products under HS codes 7228.3090 and 7225.4099 increased significantly since 2016 while export of products under HS codes 7228.3010 and 7225.4091, which fall under the boron added steel, has dipped to nearly zero during the same period. 
 
So, what happened? This time, there was a switch from using boron to chromium5 and these Chinese suppliers were using another HS Code to export their carbon steel, in the guise of alloy steel to avail of VAT rebates. Unlike boron alloyed steel, which saw a closure in the loophole, chromium alloy steel exports have not been affected as the loophole remains. 
 
Fortunately for the Global Steel Industry, the Chinese economy improved since then. Furthermore, the Chinese Government also started a Supply Reform to remove up to 150 million tonnes of domestic steel capacity. With these, the China’s steel export began to decline from 2017. 
 
China’s steel export to the world dropped 31% y-o-y to 75 million tonnes in 2017 while its export volume to ASEAN-6 dipped even more, at 43% y-o-y, to 21 million tonnes. China’s export to the world continued to dip to 62 million tonnes in 2019. Finished steel export from China to ASEAN-6 registered 18.6 million tonnes in the same year. Share of China’s finished steel export to ASEAN-6 remained around 30% since 2017. 
 
The finished steel export from China to ASEAN-6 dropped 14% y-o-y to 4.2 million tonnes in the first quarter of 2020. Export of section, bar and wire rod to ASEAN-6 continued to decline by 1%, 36% and 29% to 282,619 tonnes, 211,857 tonnes and 486,864 tonnes, respectively. 
 
China’s export of most of flat products to ASEAN-6 dropped by double digits in the first quarter of 2020. Export of hot rolled plates, hot rolled coil and cold rolled coil dropped by 29% y-o-y 35% y-o-y and 24% y-o-y to dropped to 408,625 tonnes, 529,205 tonnes and 251,901 tonnes, respectively in the same period. 
 
Note that most of the above-mentioned products, such as sections, bars, wire rod, plates, hot rolled coils and cold rolled coils are actually “like” products, that are already produced in ASEAN.
China’s export of coated sheet, which is in demand in ASEAN, continued to increase. The volume in the first quarter of 2020 registered 1.47 million tonnes, an increase of 14% y-o-y. Seamless pipes export from China to ASEAN-6 dropped 2% y-o-y to 147,478 tonnes while export of welded pipes increased slightly, by 1% y-o-y to 163,130 tonnes in the same period. 
 
In conclusion, the historical trends of Chinese steel mill exports reveal a few worrying trends and threats to the ASEAN Steel Industry:
a.     Loopholes in the Chinese Government system allows Chinese steel mills and exporters to circumvent rules and regulations to avail of tax rebates that makes them very competitive in the global market.
b.     The volume of steel exports is so large that it could decimate any local steel industry in ASEAN and elsewhere, threatening local employment, industries and economic stability.
c.     Neighbouring countries such as ASEAN and others, have been dumping grounds for many Chinese steel products for many years, given the region’s proximity to mainland China.
With the increasing crude steel production and rising inventory in China amidst sharp falls in global demand for steel during this COVID-19 pandemic, the question now is, where will all the steel go … ?
 
1 Australian Financial Review (29 Oct 2014), Boron-infused steel from China draws scrutiny, 
https://www.afr.com/policy/economy/boron-infused-steel-from-china-draws-scrutiny-20141029-11de2c
 
2 South China Morning Post (30 Oct 2014), China faces friction over steel exports, 
https://www.scmp.com/business/commodities/article/1627870/china-faces-friction-over-steel-exports
 
3 Market Realist (31 Dec 2014 updated 5 Jan 2015), Key Factors Driving Chinese Steel Exports
https://marketrealist.com/2014/12/key-factors-driving-chinese-steel-exports/ 
 
4 South China Morning Post (12 Jan 2015), Global steel prices to gain from China’s scrapping of export tax rebate, 
https://www.scmp.com/business/commodities/article/1678491/steel-prices-gain-chinas-scrapping-export-tax-rebate
 
5  Reuters (25 July 2018), Factbox - Taxing issue: China’s 
controversial steel rebate policy, 
https://uk.reuters.com/article/uk-usa-trade-china-steel-factbox/factbox-taxing-issue-chinas-controversial-steel-rebate-policy-idUKKBN1KF0DY
Source : SEAISI