Source: SEAISI
China has emerged as the largest net steel exporter in the world. Chinese steel products just match perfectly with the price conscious – low-end segments in the ASEAN region. Moreover, relatively little trade barriers are currently being imposed on China's steel products in most ASEAN member countries. China's proximity to the region also helps in fostering the very much one way steel trade. It is therefore no wonder that China's easiest export destinations are the ASEAN member countries. The situation couldn't be worse for the region's steelmakers. Mr Wellington Tong, the President of ASEAN Iron & Steel Industry Federation expressed the situation as 'severe market disorders and disruptions in production in ASEAN have resulted from China's pricing strategy' (SBB, March 2007).
IISI reported that in 2006, the year when China suddenly emerged as the world's biggest net exporter, total net exports of finished steel reached 24.5 million tons, compared to net imports of 5.3 million tons in 2005. Net exports of semi-finished steel also jumped to 8.67 million tons, up more than 50% from 2005. China's exports of finished steel in 2006 to ASEAN were roughly 14% of their total of 2006, second largest destination after South Korea at 21%. ASEAN was the main destination for semis accounting for 47% of total China's export last year. Vietnam was the largest importer of China's semis in the ASEAN region with 18% share, followed by Thailand (15%), Indonesia (7%), Malaysia(4%), and Philippines (3%).
For the first two months of 2007, ASEAN's share of China's export of finished steel products increased to 16% while maintaining its status as the largest export destination of semis with 46% share.
The latest development is that with effect from April 15, 2007 China has reduced or even cancelled the VAT rebate on a wide range of exported steel products. This could be aimed at lowering the volume or dampening the growth of steel exports as the higher tax means –assuming a constant price- an increase in the exporter's cost and a reduction in profit.
The tax rebate has been cancelled for HR coil and plate, section, H-beam, I-beam, channels, sections, merchant bars, angles, wire rods and most other long products.
Other high-end steels such as special steel, most of stainless steel grades, tinplate, colour coated, silicon steel, most of cold rolled sheets, hot dip galvanised will still enjoy 5% tax rebate on exports.
Two reasons could be deduced in analyzing China's action. The first reason for curbing exports is to avoid severe trade measures taken by the importing countries. For example, Indonesian producers had submitted an anti-dumping petition against Chinese hot rolled steel sheet. If the Indonesian Anti-dumping Committee rules in favour of the local steelmakers, big anti-dumping duties are expected to be imposed on Chinese steel. This would be bad news for Chinese exporters. Thailand is also investigating the alleged dumping of high carbon wire rods from China. Furthermore, China's steel plate is being investigated in Mexico for dumping allegation. The European Union has also issued a warning to China to curb its steel export or they will take trade actions. The list of cases against steel from China is getting longer and longer.
The second reason is perhaps to maintain a long run sustainability of China's steel industry itself. One can easily see that exporting low grade steel at very low prices would not be sustainable in the long run. Excessive production will also compel the industry to import more iron ore, coal, and alloys thus pushing the global prices of such raw materials.
The big question now is whether the move to cut the tax rebate will proof to be effective. If the additional costs of exporting is still too small, it may not. Besides, the steel producers may have a pre-set optimum (i.e. high) level of capacity utilisation, which means excess production is inevitable. Therefore, we may see more drastic measures like quota and voluntary export restraint (VER) being taken in the future.
The ASEAN steel producers can only hope for some sort of relief -either in the form of export restraint measures or import barriers- as they are generally small in size and high-cost compared to the China's steelmakers.
