CHAIRMAN’s DESK APR 07

The most important event to take place in the world steel industry in the recent weeks has been the imposition of export tax by China on selected categories of steel products. The factors that led to the decision taken by the Chinese government are well discussed everywhere. The reasons cited are many - starting with the intention to control inflationary pressures in an overheated economy fuelled by continued surge in trade surplus with the rest of the world and the fear of an anticipated increase in trade actions (Anti-Dumping, Anti-Subsidy and Safeguard) initiated in major markets such as the USA - to more sector specific objectives of curbing explosive capacity growth in the steel sector by dis-incentivizing inefficient producers of commodity grade steel that survive mainly on exports.

The export taxes covering 83 product lines under HS categorization were announced in the third week of May and are to be effective from 1st June 2007. While the existing tax for semis has been raised from 10 per cent to 15 per cent, fresh taxes ranging between 5 per cent and 10 per cent have been imposed on exports of finished steel. The items covered are also those for which VAT rebates – an equivalent of DEPB benefits in India - were removed in April this year.  The taxes have been graded with the heaviest burden of 15 per cent falling on the export of semis, followed by 10 per cent on selected commodity-grade non-flat products and 5 per cent on selected flat products. It needs to be mentioned here that export benefit in the form of  5 per cent VAT (export) rebates, however, continue on high end products such as thinner gauges of CR material, tin plates, galvanized material and other technologically sophisticated categories. Clearly, the aim of the export tax is to discourage exports of low value basic steel products and more so for the non-flat categories.

While it is easy to see why the Chinese Authorities took such a step, the effect of such measures on the world steel industry is much more difficult to predict. The number of variables that needs to be tracked is so large that one can only hazard an educated guess as to the outcome of these measures in the immediate short run and over longer time periods. Even so, it becomes essential to have some perspective on the possible fallout of the recent measures because as the behemoth driving the world steel industry the Chinese steel industry’s dynamics will have wide-ranging implications for the entire global steel economy.

It is more so for India – a major source of iron ore for the Chinese steel industry and its close competitor in the low-end of the world steel market.

It is widely believed that the export tax will make Chinese exports internationally uncompetitive at the ruling global prices. As a result, the Chinese exporters will either charge an increased price to cover the tax or they would stop exporting. The immediate anticipated result is that by vacating the international market space for commodity grade steel, China would have created exporting opportunities for those producers, including India, that have been put under pressure by surging Chinese exports. As for its effect on international prices, this withdrawal of supply may not cause an upsurge in prices because China’s announcement has coincided with the observed seasonal downturn in major global markets of Europe and Middle East which typically remains sluggish in the so-called summer months between July and September. Moreover, it is reported that the CIS countries – which had withdrawn from exports earlier this year - are once again diverting supplies to global markets. Thus, in the very short run, we expect international prices to remain more or less unchanged with the void created by withdrawal of Chinese supply being taken care of by slowing down of global demand and some compensatory rise in supplies from the CIS countries.

In the longer run, however, the dynamics may change the profile of the Chinese steel industry and also in tandem the larger picture in the other steel producing nations. Within China, the export tax will seriously affect viability of China’s least efficient small steel mills and may lead to phasing out of redundant capacities and thus greater consolidation, provided the political system at the regional and local levels allows closure of unprofitable businesses. So it is expected that the tendency of future expansion in capacities in China will be confined to the higher end of the market. According to leading steel analysts this augurs well for the intended steelmaking capacity expansions projects in India, Brazil and other emerging economies endowed with indigenous availability of raw materials.

In India conditions are right for steel capacity expansion supported by a surge in steel demand. In the last few years there has been a paradigm shift in the macro economic dynamics of the Indian economy. With manufacturing industries registering growth rates of around 15% and capital formation levels touching 36 per cent of the GDP, the steel demand is likely to grow at more than 10% per annum over the next five years. With contingent conditions in the global market taking a beneficial turn, India is well on its way to join the super league of steel producers globally.

K A Singh Deo                           

Joint Secretary                        

Ministry of Steel                           

& Chairman, JPC