China  will reduce or cancel the value-added  tax  (VAT) rebate on steel pipe exports in the near future, which currently  stands  at  13  percent,  in  order  to curb increasing exports  and  the growing trade surplus, industry insiders told Interfax yesterday.

Two major types of steel pipe, welded pipe and seamless pipe, are two of the few  steel  products  that  have so far managed to escape VAT rebate
cuts.

"There is  a  market  rumor that the Chinese government will cut the VAT rebate on  steel  pipe  exports  from a current 13 percent to 8 percent,
meaning  our export profits will decrease 5 percent," a senior official, surnamed   Zheng,   with   the   Tianjin   Pipe   (Group)  Corporation's
international trading branch, told Interfax.

TPCO is  currently  China's  largest seamless pipe manufacturer, with an annual capacity  in  excess  of  1.6 million tons. The company has set a
target to reach an annual capacity of 3 million tons by 2008.

Zheng said  that  seamless  steel  pipe exports currently account for 25 percent  to  30  percent  of  the company's total output each year. Last
year, the  company  generated  $500  million in export turnover, surging 60.8 percent  from the previous year with net profits rocketing by 165.6
percent.

Zheng voiced  concerns  that  the  government  will  probably cancel VAT export rebates,  which  will  result  in  diminished company profits and
reduced competitiveness on the international market.

TPCO's average  FOB  price for seamless pipe is currently 4 percent to 5 percent higher than its domestic sale price, according to Zheng.

"The export  market  is  currently the most profitable part of the steel pipe industry,  and  canceling  the VAT export rebate will finally force small-sized steel pipe producers out of the export market, and result in domestic  oversupply.  Chinese  steel pipes will no longer enjoy a price advantage in overseas markets, and foreign buyers may well turn to other countries.  As  far as I know, South Korean steel pipes still enjoy a 10 percent VAT export rebate," he explained.

"The government  is  facing  international pressure to remove steel pipe export subsidies.  Steel  pipe  is  the only steel product excluded from steel product  export  policy  adjustments  launched  in 2004. If export growth in  the  first  half  of this year remains strong, the government will take further measures to control steel product exports, in order to further  reduce  China's  huge trade surplus," Li Lixia, an analyst with Beijing  Custeel,  affiliated with the China Iron and Steel Association, said.

Even though  China's  steel pipe manufacturing sector is not included in the list of severely polluting and energy intensive industries, protests from foreign  countries have forced the government to reconsider the VAT rebate.

The Australian  government has been investigating dumping allegations on imported  steel pipe manufacturers since last June, involving pipes from
China, South Korea, Thailand and Taiwan.

However,  the  Australian  government  recently decided not to impose an anti-dumping tax on the majority of Chinese steel pipe manufacturers.

"In my opinion,  the  Chinese  government  will  not  cancel  VAT export rebates,  but  will  probably reduce them this year. However, there have
been rumors  that the VAT export rebate will be canceled on July 1," she added.

She said  the  policy  would  have little impact on major players, since they have  fixed  long-term  contracts  with  stable  clients,  but will significantly affect profits for small-sized manufacturer and traders.

A trader  surnamed  Ma  with  Tianjin  Aprometal  Co. Ltd, a small-sized welded pipe  manufacturer,  said  the  company  exports  100  percent of
products to Australia, Europe and the United States, and is prepared for any policy change.

"We have  already  been  told by government sources that the VAT rebates will be  reduced by at least 5 percent. When the policy is clarified, we
would ideally like to split the cost increase with our clients. However, our long-term  plan is to shift from exports to focusing on the domestic market," he said.

According to Ma, welded pipe prices in the domestic market are currently between  $60 and $80 per ton lower than overseas prices, causing exports
to dramatically increase.

China exported  1.24  million  tons  of  seamless pipe in the first four months this  year,  climbing  101.38  percent  from the same period last year.

Export  turnover  amounted  to  $1.45  billion during this period, growing 107.72 percent year-on-year.

Welded pipe  exports  reached 1.53 million tons in the first four months this year,  swelling 138.37 percent from the same period last year while export turnover  increased  171.4 percent to $1.15 billion, according to statistics released by the General Customs Administration.