In China’s definition, manufacturers include the whole industrial chains of both the nonferrous and ferrous, from upstream mining to downstream end-users such as auto, electrical home appliance, and machinery manufacturing, and both domestic sales, and imports and exports will be included in the VAT adjustment starting April 1, and Beijing's decision to lower the VAT will surely help the domestic manufacturers to better weather the slow-down in the national economic growth with a lower government tax to pay, Mysteel Global understands.
Lower tax, however, does not necessarily lead to lower prices in the industrial products, though it provides more room for the manufacturers to play in the aspect of prices when the market situation calls for such moves.
“In the end, it depends on how high the profit margin is for each particular sector, as for steel mills, the margin is so thin for the time being that there is no way for us to reduce our steel prices to fully or even partially reflect 3 percentage point difference,” a sales official from a major steel mill in North China said, admitting that the steel mills’ profitability is just about 1-2% for the time being.
The sentiment of the steel mill official has been widely shared among the ferrous chain participants in China including the other steel producers with all of them pinning down the performance of their businesses as the crucial factor whether they are going to adjust their finished product prices.
Chinese steel producers in no rush to take action
Many steel mills in China admitted that the move will in theory ease their cash strain, reduce their operational costs and enhance their profitmaking ability.
“This will greatly benefit us,” an official from a steel mill headquartered in Tangshan, North China’s Hebei province, adding, “the VAT cut can be viewed as the central government’s refunding 3 percentage points of extra profit to us, which we can use to invest in technology to improve the quality of our products.”
The VAT cuts will lead to a Yuan 1.2 billion ($178.8 million) tax burden relief to Beijing Jianlong Heavy Industry Group, China’s fifth largest steel producer, its chairman Zhang Zhixiang disclosed the specific number when interviewed by the China Metallurgical News on the sidelines of the two top-level political annual sessions in Beijing last week.
However, many Chinese steel mills admitted not being ready to make any adjustments as a result of the VAT cuts immediately after April 1, and some Chinese steel traders may have to wait longer for any change of behaviour from steel mills, if any, as the common practice has it in the domestic market that any orders made after the 15th of the prompt month will be invoiced in the following month when delivery is fulfilled.
Some Chinese steel mills still stated 17% VAT in the invoices for some orders made in the latter half of April 2018 despite that the delivery was completed and full payment was collected in May, after the VAT adjustment to 16% took effect on May 1 2018, an official from a steel mill in Central China’s Henan province said.
In reality, therefore, these Chinese steel mills passed on the benefit to the buyers last May, as most of steel products sold in China are priced including VAT and mills are taking care of the VAT payment to the government, Mysteel Global understands.
“This year, however, we have reflected the VAT changes immediately in the invoices on hearing the definite implementation date though we have not adjusted our prices, as any relief, however little, helps, given that Q1 has not been a good quarter for us,” he admitted.
Other than slow steel sales in the domestic market, Chinese steel mills have witnessed their operational costs rising so far this year as the winter restriction and harsher emergency restrictions on their sintering, coking, and blast furnaces have forced them to utilize higher-priced raw materials while steel prices have failed to transfer the added costs to buyers.
China’s steel exports care only competitiveness
As for China’s steel exports, price variation prior to and post the VAT change will be minor, as the decisive power will be the pricing competitiveness, a Shanghai-based steel trader said.
“All of China’s steel exports are eligible for VAT though some have VAT rebates, some don’t, and exports are only possible when the prices are competitive, a lower VAT helps Chinese steel mills in competing against other rivals in the global market, but the small adjustment will not lead to huge advantage,” he said.
China’s steel mills are only keen to export as a supplement when the domestic market is not performing by playing their advantages in prices, and over January-February, the country’s steel exports reversed up 12.9% on year to 9.48 million tonnes in contrast to three years of continuing declines over 2016-2018.
China’s iron ore miners to closely watch import market
China’s domestic iron ore miners have yet come to any conclusion on whether to reduce their offer prices because of the VAT change, though a sales official from a Shandong-based mining company in East China disclosed that they will probably stick to their offering prices.
“I believe the government’s VAT adjustment is meant to lighten our burden, so we will act accordingly, not transferring the benefits to steel mills,” he said, admitting that they did not change their prices at all last May when the VAT was cut to 16%.
A Beijing-based iron ore importer, however, brought up the possibility that the Chinese iron ore miners may be forced to reduce their prices to stay competitive.
“Steel mills will pay the VAT themselves in Chinese Yuan when they receive the shipped iron ore from overseas and declare to the China Customs, and they may prefer to buy more from overseas if the three-percentage-point difference in VAT makes domestic supplies less attractive,” he said.
As of March 18, the offer price for 65% Fe content concentrates in Shandong’s Zibo stayed at Yuan 820/dmt ($122.2/t) EXW and including 16% VAT, already higher than the 65% grade seaborne iron ore fines or concentrates at about $99-100/dmt CFR China, according to Mysteel’s database.
China’s automakers to share the sweet taste with consumers
“China’s auto sales price will be done on April 1 so that the consumers will enjoy the benefit the first minute when the new VAT is effective,” an official from an auto maker in Shenyang, Northeast China’s Liaoning province said with confidence.
By doing so, “we hope this will help promote auto sales, and we auto makers will benefit from the VAT cut too, as surely our raw material procurement costs should come down a bit as well, this will be a win-win deal,” she added.
An official from an auto manufacturing plant in Shenzhen, South China’s Guangdong province, estimated the actual production cost reduction to be less than three percentage points in reality because of rising costs in other aspects even though all the upstream suppliers of raw materials such as auto sheet adjust their price downward to fully reflect the VAT adjustment.
China’s auto manufacturers have been under greater pressure with their sales volume shrinking, and the February sales volume posted a steeper decline of 37.4% on month to 1.48 million units and the total sales over January-February fell 14.9% on year to 3.85 million units, as reported.
Written by Mysteel Global Editorial, email@example.com