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China is likely to end a low-tariff policy on ferro-alloys, steel and copper in the next three months as it steps up efforts to cool its power-hungry metals sector, a government official has said.

A ministry of commerce official has said that Beijing is considering scrapping so-called tolling and processing provisions on other metals after agreeing in principle to abolish such trade on aluminium.

The provisions allow smelters to import raw materials duty-free before exporting the finished product.

“It’s the hot topic in China right now. Everyone is concerned: traders, producers and consumers,” a ferro-alloys trader in Singapore says.

The scrapping of the policy on ferro-alloys, an essential additive to steel, would slash China’s exports and create a domestic surplus that would force half of the country’s smelters to close down, industry officials say.

Copper would not be hit as hard, because the local market – which consumes about a fifth of world supply – is in deficit, copper smelter officials comment. But they add that China would import less copper were domestic supply to grow.

China is the world’s top supplier of ferro-alloys, but the government is keen to scale back output to conserve power.

The world’s seventh-largest economy, which expanded 9.5% in the year through the first quarter, was hit last year by its worst power crunch in two decades.

Beijing had planned to end the provisions on aluminium from May 1, but senior government officials agreed to delay the termination until the third quarter after several smelters said they would be forced to close.

“We’ve heard the government will cancel tolling and processing from July 1. This will have a very big impact,” says a foreign investor who owns two ferro-alloy plants in China.

Other market sources cite June 1 as a possible date for the removal of the policy.

Last year, China boosted output of ferro-alloys by 20.3% to 2.2mn tonnes, of which it exported a quarter.

China exported 1.4mn tonnes of primary aluminium last year, about 80% through tolling and processing.

Like aluminium, most of the ferro-alloys exported by China are produced through tolling and processing, industry officials comment, without supplying more details.

The scrapping of tolling trade would affect China’s ability to import manganese ore, for example, from suppliers in Africa, India and Kazakhstan.

Among major suppliers of ferro-alloys to the world market are Samancor in South Africa, owned 60% by BHP Billiton and Kazakhstan’s state-owned Kazchrom.

More than half of China’s ferro-alloy smelters are currently running below capacity, deterred by low prices.

Suppliers were also hit from January 1, when Beijing stopped reimbursing eight percentage points of the 17% value-added tax that exporters of ferro-chrome, ferro-manganese and silico-manganese must pay.

Those exports not under tolling and processing provisions are also subject to a separate 5% tax, while importers of raw materials are charged 13% value-added tax.

“Chinese suppliers can call whatever price they like, but if the steel mills in Japan and Korea are not willing to pay these sorts of prices, it’s useless,” the Singaporean trader adds.