SHANGHAI Despite recent speculation that the Chinese
government could support domestic iron ore producers by
slashing taxes by as much as half, such a move may be unlikely
as it would be very complicated and possibly ineffective in
practice, sources told AMM
China Iron and Steel Association deputy secretary-general
Wang Xiaoqi said at a recent iron ore conference in China that
the government was studying tax reductions of 10 to 15
percentage points (
amm.com, Nov. 16).
The idea is to give Chinas marginal producers more
support and reduce reliance on imports after the third-quarter
price slump increased pressure on domestic miners.
This year we saw a very moderate contraction in
production of domestic Chinese iron ore at the trough of the
spot market price. A lowering of taxes on mines would certainly
relieve the cost position of miners in China and stimulate
production, a Metal Bulletin Research analyst in the
United Kingdom said.
For mines at the top of the cost curve, a halving of effective
tax rates would reduce overall costs including tax by as much
as $15 per tonne, providing more of a buffer for domestic
producers against import penetration.
But the complexities of the tax system, existing policy
trends and the structure of the market all stand in the way of
a meaningful tax reduction.
Overall effective tax rates on iron ore production currently
stand at about 26.2 percent of revenue, according to Xie
Sanming, an official at the Ministry of Industry and
Information Technology (MIIT). But that rate incorporates a
wide range of different taxes and fees, some of which differ
from region to region.
The resource taxes are mostly paid to and controlled by
provincial governments, so the central governmenteven if
it wanted to cut iron ore taxesmight struggle to push
through a broad cut.
Lower resource taxes would also reverse a long-standing trend
toward the higher levels confirmed in February, when the
government raised the resource tax base to 80 percent of sales
from 60 percent for the previous 10 years and 40 percent for
most of the 1990s.
Perhaps the most important factor is that a tax cut might
not have the desired effect due to Chinas position as a
marginal cost producer.
Even if the tax policy turns into reality, it only means
that cost support for iron ore will go weaker, as China is one
of the high-cost ore suppliers, a trader in Shanghai
In other words, lower taxes lower the floor for iron ore
prices, meaning little ultimate benefit for domestic miners
from a broad-based tax reduction but a negative effect on
In the longer term, average domestic grades are declining and
seaborne iron ore supplya big chunk of which is
lower-costis growing faster.
The seaborne supply expansions would gradually lower average
iron ore prices and make marginal output unviable in China,
even with a tax cut, although high freight costs might still
keep some inland mills and mines insulated from seaborne iron
A version of this article was first published by AMM
sister publication Steel First.