China's elimination and reduction of its value added tax rebates for steel exports announced Tuesday could moderate the amount of Chinese steel coming into the U.S. and world markets.

"It's a good first step," said steel analyst Charles Bradford.

The change eliminates the country's rebate on the value added tax on some steel exports and reduces the VAT rebate to 5 percent on higher value steel others. A value added tax -- normally referred to as a VAT -- is a tax placed on sales and service transactions in most foreign countries.

Since September 2006, China has rebated 8 percent of the value added tax on all exports of finished steel leaving the county. Before that, the rebate had been 11 percent of the VAT.

Rebating the tax or a portion of the tax to the exporter reduces the exporter's costs and increases its profit. Thus, eliminating the rebate makes it more expensive to export products.

China changed from being a net steel importer in 2004 to being a significant exporter in 2006, which caused concern among domestic and European Union steel producers about China's imports flooding their markets with low priced steel, especially the high-value steel products.

Domestic and European steelmakers contend Chinese steel is subsidized by its regional governments, has extremely cheap labor costs and doesn't comply with the environmental or safety standards imposed by countries with market economies.

In 2006, China's steel companies exported 4.8 million metric tons of steel into the U.S. market. Total Chinese exports fell to 4.4 million net tonnes in February, but export licenses (statement to the government of intention to export) grew for March and exports are expected to be about 5.5 million net tons. Actual March export figures aren't yet available.

The Chinese government's action could mean an increase in China's domestic steel prices and a lowering of its exports, said Bradford, president of New York based Bradford Research/Soleil Securities. However, Bradford doesn't think it will reduce them substantially because the cut in the VAT rebate "wasn't that big."

"Steel prices can move that much in a couple of days," he said. "The real difference will be determined by what U.S. mills do with their prices. If they're increased, we'll become an attractive market for (steel) imports again."

What is affected by China's VAT rebate cut?

China's VAT rebate will now be 5 percent for exports such as tinplate, color coated, non-alloy steel forged bars and silicon steels. Most types of cold rolled coil and hot dipped galvanized steel also will enjoy the 5 percent rebate.

The rebate has been abolished for hot rolled plate, hot rolled coil, sections, H-beams, I-beams, channels, merchant bars, angles, wire rods and most other longs.

Most stainless steels - with the exception of low-nickel containing series - will continue to enjoy a 5 percent rebate. However, the rebate has been abolished for exports of ferro-manganese stainless with nickel content of less than 7 percent.

SOURCE: Steel Business Briefing