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End of Rebate to Help Cool Iron Ore Prices

China's decision to scrap a 13 percent tax rebate on steel billet and ingot exports will help rein in runaway iron ore prices and ensure the healthy development of the nation's steel sector, industry analysts said Monday.

The decision, which took effect on April 1, will considerably reduce China's steel billet and ingot exports this year, analysts said.

Although this move may put many small firms out of business, the overall impact on the steel industry will be beneficial, said Xu Zhongbo, chief executive officer of Beijing Metal Consulting Co Ltd.

Xu blamed international mining firms' recent iron ore price hikes largely on many small steel producers in China lacking long-term and stable iron ore supplies and buying the raw material at very high prices from intermediaries.

On April 1, Australia's BHP Billiton and Rio Tinto, and Brazil's Companhia Vale do Rio Doce raised iron ore prices by a hefty 71.5 percent.

Last year, many of China's small steelmakers bought iron ore at US$100 to US$120 per ton, much higher than the US$40 per ton of big domestic counterparts enjoying stable iron ore supplies, according to Xu.

"Small steel producers in China continued to enjoy bumper profits last year thanks to high steel prices, despite iron ore being very expensive. However, their export costs will grow sharply this year due to the removal of the tax rebate and many of them will go out of business," he told China Daily yesterday.

China's fast-growing steel sector, the biggest in the world, will have to increase its dependence on imported iron ore due to short supplies at home.

China's steel billet and ingot exports surged 7.5 times year-on-year to 1.4 million tons during the first two months of this year, according to statistics from the China Iron and Steel Association.

The nation imported 39 million tons of iron ore during the period, up 23.7 percent year-on-year.

Zhou Xizeng, a steel analyst from CITIC Securities, predicted China's total iron ore imports will increase to 240 million tons this year from 208 million tons in 2004.

"The removal of the steel export tax rebate is part of the Chinese Government's efforts to control steel demand and prices in order to prevent inflation," Zhou remarked.

Steel prices in the domestic market have risen on average by 13 percent since the beginning of this year.

"The government's decision will aid the steel sector's sustainable development. Overheated investment and blind competition would recur if steel prices and the sector's profits remained too high," Zhou told China Daily.

Fixed asset investment in the sector tumbled 9.5 percent year-on-year to 15.4 billion yuan (US$1.86 billion) in the first two months of this year due to the government's macro-economic controls.

The sector reported profits of 15.9 billion yuan (US$1.92 billion) during the period, a year-on-year rise of 11 percent.

The sector's total profits in 2004 rose 60 percent year-on-year.

China's steel output stood at 50.1 million tons during the first two months of this year, up 22 percent year-on-year.

Earlier this year, the steel association forecast the nation's steel output would reach 300 million tons this year, up from nearly 273 million tons in 2004.

(China Daily April 5, 2005)

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