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 sister publication Steel First.

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 China’s 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 government—even if it wanted to cut iron ore taxes—might 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 China’s 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 said.

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 government income.

In the longer term, average domestic grades are declining and seaborne iron ore supply—a big chunk of which is lower-cost—is 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 ore.

A version of this article was first published by AMM sister publication Steel First.