The Chinese government will cancel or reduce value added tax (VAT) export rebates for steel pipes on July 1, in response to international pressure concerning its huge trade surplus and subsidies on some types of steel products.

The Ministry of Finance announced yesterday that value added tax (VAT) export rebates for welded steel pipe will be cancelled and rebates on seamless steel-pipe will be reduced from a current 13% to 5% on July 1.

United Steelworkers and six other U.S. welded steel-pipe producers filed petitions to the U.S. Department of Commerce and the U.S. International Trade Commission (ITC) on June 7 this year, accusing Chinese steel-pipe companies of dumping activities, and also reprimanding the Chinese government for granting a 13% export tax rebate on welded pipe products.

Policy Impact

A Shanghai steel product trader, who wished to remain anonymous, commented that the policy would further decrease prices of major steel products in the domestic market, including steel pipe, hot-rolled coil and hot-rolled strip, which can be processed into welded steel pipes.

"Steel product prices in the domestic market will drop significantly in July, as it is too risky for us to export products in July and August, when overseas market demand is expected to drop. Moreover, the uncertainty as to whether or not the government would implement the policy has resulted in most traders stopping signing new contracts with foreign clients in the last 2 weeks. However, traders are hastening the export of products covered by previous contracts," the trader said.

The new policy will put more pressure on China's already oversupplied steel pipe market, a Shanghai Mysteel analyst, named Zeng Jiesheng, told Interfax.

China produced 20.09 million tonnes of welded steel pipe in 2006, up 15% from the previous year, and 14.84 million tonnes of seamless steel pipe, up 29.8%.

In the first five months of this year, welded steel-pipe production reached 8.55 million tonnes, up 11.9% year-on-year. Seamless steel-pipe output grew by 19.7% to 7.05 million tonnes.

"The new restraining export policy has further weakened market confidence, with overall steel product prices already beginning to fall at end of May," he added.

The average price of 6.5 mm wire fell by RMB 130 per tonne to RMB 3,559 per tonne, 2.75 mm thick hot-rolled coil fell by RMB 100 per tonne to RMB 4,227 per tonne and seamless pipe (159 mm x 6 mm) fell RMB 50 per tonne to RMB 4,948 per tonne in the domestic market last week, compared to the last week in May, according to figures released by the China Iron and Steel Association.

A Minsheng Securities analyst, named Wang Zhe, said that he expects the price gap for steel products in domestic and overseas markets to further expand after the policy takes effect on July 1.

"The steel pipe manufacturing sector is currently very profitable, and the rebate cancellation is not expected to significantly lower profits in a the long-run. However, I think domestic steel pipe prices will undergo a large correction in July and August as exports drop, with prices recovering gradually after the international market becomes accustomed to the increased cost of Chinese exports," he said.

Official Chinese Government Stance on Welded Pipe Exports

China's welded pipe exports to the U.S. are completely in line with market rules and demand, and domestic exporters will use every possible legal countermeasure to protect their legal export rights, the China Chamber of Commerce of Metals Minerals and Chemicals Importers and Exporters (CCCMC) announced in a statement released Monday.

The statement was an official Chinese government response to the recent request from U.S. steel mills to impose an 88% anti-dumping import duty on Chinese circular welded carbon quality steel pipe (welded pipe).

"We have been informed that the ITC has filed an anti-damages lawsuit against Chinese welded steel-pipe exporters, and will conduct an investigation in the near future. The Department of Commerce has not yet filed any anti-dumping or countervailing lawsuits so far," a CCCMC Legal Affairs Department official, who wished to remain anonymous, told Interfax today.

More than 20 domestic Chinese steel pipe producers and exporters have pledged to defend themselves against the lawsuits, and both the CCCMC and Ministry of Commerce will afford them every assistance necessary, the official said.

The official further commented that U.S authorities have no evidence to support the dumping charges on Chinese welded pipe exports, and all Chinese welded pipe exports conform to international trade standards and play a key role in feeding U.S. market demand.

According to the statement, Chinese enterprises strongly resent the U.S. authorities' use of both anti-dumping and countervailing investigations into Chinese products, which could be regarded as a breach of WTO regulations.

The CCCMC has repeatedly warned the U.S. government that their abuse of WTO trade dispute measures is not a suitable way to solve trade disputes between the two countries, and is damaging to the long-term healthy development of the U.S. steel industry.

"China's steel-pipe exports cannot be regarded as dumping, as our sale prices in the U.S. market are significantly higher than in the domestic Chinese market. Moreover, it is just this large price gap that is driving Chinese welded pipe exports," a trader surnamed Ma with Tianjin Aprometal Co. Ltd, a small-sized welded pipe manufacturer told Interfax.

The difference in price of welded steel pipe in China and the U.S. is currently at least $50 per tonne, and although the Chinese government intends to cancel the 13% VAT export tax rebate on welded pipe products on July 1, the price gap will still remain above $10 per tonne, according to Ma.

"I think the U.S. countervailing investigation will be cancelled immediately after the new policy takes effect on July 1. Moreover, this policy will certainly squeeze our profit margins in the future," Ma said

Tianjin Aprometal Co. Ltd. currently exports 100% of its products to Australia, Europe and the United States.

According to ITC and U.S. Department of Commerce definitions, dumping can be said to occur when a foreign producer sells a product in the United States at a price that is either below the sale price in the producer's domestic market, or lower than the cost of production. Subsidizing occurs when a foreign government provides financial assistance to benefit the production, manufacture, or exportation of goods.

China exported 1.24 million tonnes of seamless pipe in the first four months this year, soaring 101.38% from the same period last year. Export turnover amounted to $1.45 billion during this period, up 107.72% year-on-year.

Welded pipe exports reached 1.53 million tonnes in the first four months this year, leaping 138.37% from the same period last year, while export turnover was up 171.4% to $1.15 billion, according to statistics released by the General Customs Administration. 

Commentary

Cancellation or reduction in rebates will have little impact on current production, export volumes and ultimately, trade imbalances. Any profit margin squeeze will be short-lived as domestic prices will come under increased pressure do to excess capacity.

Further more, capacity is not going to slowdown given that fixed asset investment continues to flow contrary to official rhetoric.