China deal may trigger knee-jerk metal sales, but little long-term impact

China’s bold deal to ditch
its disputed export tax rebates on some niche aluminum and steel
products could flood the saturated global market, as producers
scramble to sell excess metal ahead of the changes, prolonging
the industry’s pain, traders said.

While a rush to offload unwanted product may be a knee-jerk
reaction and last a short time, any increase in shipments from
the world’s top producer would likely stir concerns about the
world glut that has led to the industry’s worst crisis in a
generation.

It would also hurt domestic and international prices, which
are languishing at their lowest levels in years. The world’s
second-largest economy accounts for half of global steel and
aluminum output.

To ease trade friction with Washington, Beijing agreed on
Thursday to scrap a program that has provided export subsidies
of some $1 billion over three years to a range of sectors from
aluminum to textiles.

U.S. regulators gave few other details on the types of metal
product or when the steps would take effect, but it was widely
welcomed as a small step toward creating a more level playing
field for metal producers across the globe.

It could, for instance, do away with the country’s
13-percent value-added tax rebate on semi-fabricated aluminum
products that has spurred exports and complaints that China is
exporting its excess capacity, hurting prices and damaging
Western producers like Century Aluminum Co.

While waiting for more details, aluminum traders in Asia
said they would still sell excess material abroad, and may even
pick up the pace of deals before any clampdown.

“There’s … bound to be a flood of exports running up to
the implementation. In aluminium and steel, there are enough
stocks to feed an export boom,” said Caroline Bain, senior
commodities economist at Capital Economics in London.

SYMBOLIC VS SUBSTANCE

Steel and aluminum trade groups hailed the decision to ditch
some favorable export tariffs as a symbolic step as China seeks
to placate the United States after it lodged a complaint with
the World Trade Organization last year.

U.S. trade experts said the news lacked much substance
beyond the headlines.

One source said the deal was more of a public relations
stunt after congressional hearings this week with U.S. steel and
aluminum companies including United States Steel Corp.

That is because it does little to tackle complaints from the
European and U.S. steel and aluminum makers that Beijing is
propping up its domestic industries through indirect subsidies,
like low-cost energy, interest-free loans and free land.

“On the surface, it sounds like a big move. But I don’t know
if it’s just another rule that will be ignored,” said Lloyd
O’Carroll, senior analyst with CRU Group in Richmond, Virginia.

The tax reform was limited in scope too – specialty steel
products, like stainless steel and super alloys used by the
aerospace and automotive sectors, only account for about 2
percent of the 1.6 billion-tonne global steel market.

While the 40 million-tonne aluminum market is smaller, the
effect of the policy change is potentially greater as it could
include a broader range of products from plate and sheet used by
the automotive sector to foil.

Last year, China imported just under 400,000 tonnes of
aluminum plate, sheet and strip worth over $1 billion into the
United States, more than double Canada, the second-largest
supplier, and almost four times the volume of 2012.

The country shipped just over 150,000 tonnes of aluminum
foil, worth half a billion dollars and accounting for two-thirds
of the total. That was way ahead of Germany, the second-largest
with almost 18,000 tonnes, and double 2012 volumes.

Even if Chinese exports slow due to the tax rebate change,
it will do little to allay concerns about China’s excess
production capacity that critics have said is causing the glut.
China has said it has taken measures to curb surplus output.

(Additional reporting by Melanie Burton in Melboure and Eric
Onstad in London; Editing by Matthew Lewis)

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