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FEATURE: China’s steel mills applaud possible VAT cuts

China’s steel industry is in general excited at the news on Beijing’s mulling cutting the value-added tax (VAT) on the domestic manufacturers and small and micro enterprises to 13% from the present 16%, possibly in 2019, expecting the measure to reduce their production costs, helping them enhance their competitiveness especially in the global market, according to market sources on March 5 and 6.

China has cut the prevalent 17% VAT on all major industrial and consumer goods to 16% since May 1 2018 with manufacturers including the ferrous industry being a beneficiary too.

The latest proposed cut of 3 percent points on the manufacturers has caught the market by surprise even though many expected China will be working along the route to sustain its domestic demand and economic growth in 2019.

“Reducing taxation and fees have become rather necessary for China to bolster domestic consumption and to guarantee steady investments into the manufacturing industry,” a Shanghai-based senior ferrous analyst said, noting, “China has been adjusting a number of taxation and fees downward since last year but the degree of cut is greater this year with the focus on the upstream industries such as manufacturing.”

China’s National Bureau of Statistics includes ferrous, nonferrous, oil, medical and chemical, computer, telecommunication, and electronics in the manufacturing sector, Mysteel Global notes.

Other than the proposed VAT reduction on the Chinese manufacturing industry, China’s Premier Li Keqiang also mentioned a possible VAT cut on the domestic non-manufacturing sector including transportation and construction industries to 9% from 10% as part of the many measures the central government in consideration to support the domestic economy in 2019, as reported.

The VAT revision has been speculated in China especially in the nonferrous market ever since last year, as domestic aluminum smelters, for example, have been looking forward to a cut so as to lessen their suffering from long lossmaking amid the persistent oversupply and at the same time dismal domestic demand, a Shanghai-based nonferrous analyst said.

VAT cuts may enhance mills’ profitability?

Lower VAT will help the whole Chinese steel industry reduce their operational costs including production cost, which may lead to higher steel margins, a Beijing-based market pundit remarked, emphasizing, “In principle, we are talking about dozens of billions of Yuan in money sense.”

“With reduction in taxation at such a scale, Chinese manufacturers including steelmakers will have more flexibility when setting their prices due to the reduced financial burden,” an official with China’s taxation system told Mysteel on Wednesday.

“Domestically speaking, it will not add great price competitiveness as all manufacturers enjoy such benefits. However, when the products are put into the international market, their competitiveness will surely be strengthened,” he said.

The Shanghai analyst, however, warns that steel prices may be immediately under pressure when the VAT reduction takes effect.

“Construction and transportation industries are the major consumers of long steel products, and their VAT cuts are much less than the manufacturers, so they may force their upstream manufacturers including steel mills to surrender some of the extra profits borne from lower VAT,” he said.

He added, though, that under the scenario, long steel prices may be under greater pressure than flat steel.

Downstream users of flat steel, such as home appliance and auto manufacturers, being granted the same degree of VAT cuts, however, may not stand a strong position to ask their steel suppliers to share some extra profits, especially when the margins in flat steel in general are already smaller than in long steel, the Beijing analyst agreed.

Mysteel’s latest profit study among China’s 91 blast furnace mills showed that their average margin for rebar was at Yuan 303/t over December 26 2018-January 25, much higher than Yuan 97/t for HRC.

VAT reduction to help Chinese steel producer lower liability?

In the broader context, the VAT cuts, when becoming a reality, will also aid Chinese steel enterprises with further reducing their debt-asset ratio, the Shanghai analyst mentioned.

In 2018, China’s steelmakers managed to decrease the ratio further by 2.63 percentage points on year to 65.02% thanks to yet another robust performing year with the highest profits in the past few years, according to the latest statistics from China Iron & Steel Association.

He admitted, though, that the reduction of the ratio will still heavily rely on each steel producer’s capability in financing, controlling their operational costs, enhancing their efficiency, and maximizing their capitals, and the bottom line is the domestic steel demand and domestic steel prices.

Written by Olivia Zhang, zhangwd@mysteel.com and Venus Wang, wangyi@mysteel.com

Edited by Hongmei Li, li.hongmei@mysteel.com