Jan. 7, 2015

Change in Chinese Rebate May Slow Exports
 
As of Jan. 1, the Chinese government has dropped the tax rebate it offered to exporters of four types of boron-added steels. Without the rebate, Chinese steel producers are less likely to export the products to the United States and other parts of the world, says John Packard, publisher of the Steel Market Update e-newsletter. The recent rebate change applies to Chinese exports of hot-rolled sheets from coils, hot-rolled skelp, hot-rolled wire rod, and hot-rolled debars and square bar, which are now subject to the full VAT of 17 percent.

Chinese steel producers are infamous for adding tiny amounts of another material, such as boron, to steel products as a way to circumvent U.S. trade laws. Hot- and cold-rolled steel may be subject to an import duty, whereas an alloy of steel and boron is not.

To put this development into context, one must have a basic understanding of China’s VATs or Value-Added Taxes and export taxes on semi-finished steels, plate, hot-rolled, cold-rolled and coated flat-rolled steels. China’s system, which places a number of taxes both on steel produced for domestic use and steel for export, is widely misunderstood, Packard says.

While it is true China is one of the few countries that taxes exports, its producers can qualify for an offsetting rebate by adding just a tiny amount of boron to create an Alloy Steel under China’s HS Code.

Whether a Chinese steel product is sold domestically or exported, the buyer must pay a VAT of 17 percent. On top of that VAT, an export tax of 25 percent is added to semi-finished steels, including slabs, billets and blooms. Thus, exports of semi-finished steels from China face the potential for a 42 percent total tax.
The additional export tax is not charged on flat-rolled or finished steels such as plate, hot-rolled, cold-rolled, galvanized or Galvalume (zinc-aluminum) steels.

The picture gets blurry when boron is added to the steel. Adding as little as 0.0008 percent boron to the mix classifies some products as alloys under China’s HS Code and qualifies them for a tax rebate. Most experts believe these Micro Alloys are designed primarily to manipulate the trade rules as such tiny amounts of boron would have virtually no effect on the formability of the steel. “The addition of 0.0008 percent is so small that it would not be a benefit on any sheet products and should not be classified as an Alloy Steel,” says John Eckstein, metallurgist associated with Steel Market Update’s Steel 101 workshop.

Steelmakers and regulators in the United States tend to agree. In 2011, the Department of Commerce ruled that Chinese producers had added small amounts of boron to cut-to-length plate primarily as a means to circumvent U.S. trade laws and began applying antidumping duties on such imports.

Under China’s system, semi-finished steels containing boron qualify for a 9 percent rebate, which is taken off the 25 percent export tax. The 17 percent VAT remains in place. Thus the tax burden drops from 42 percent to 33 percent.

Prior to the Jan. 1 change, the rebate for hot-rolled plate and coil containing boron was 9 percent, which was deductable from the 17 percent VAT.

For cold-rolled and coated products (galvanized and zinc-aluminum), the rebate for adding boron to the steel remains 13 percent, which is deducted from the 17 percent VAT for a total tax burden of 4 percent.

“The Chinese steel mills and trading companies are clever when it comes to taking advantage of tax loopholes. Worldwide, we may see a reduction in Chinese exports. However, bottom line, the decision to remove the rebates on the four products mentioned above will be of little help to the flat-rolled steel industry in North America,” Packard says.

For more information, visit www.SteelMarketUpdate.com.

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