China Iron-Ore Tax Cut Seen by Macquarie Leading to Lower Prices

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Potential changes to tax on iron-ore mining in China, the biggest user of the material, will result in lower prices without benefiting the local steel industry, according to Macquarie Group Ltd.

China’s Ministry of Industry and Information Technology submitted a plan to ease the tax bill on iron-ore mining companies, China Securities Journal reported on Nov. 20, citing an unidentified person. The potential for tax changes may have a negative impact on investor sentiment toward the iron-ore industry until there is more clarity, Macquarie said in an e-mailed report yesterday.

“The Chinese steel industry would not benefit from reduced tax rates in iron ore,” Macquarie analysts including Colin Hamilton in London said. “Certainly iron-ore prices would come down, but given the over-capacity issues in the steel sector, margins are unlikely to improve and steel prices would just fall to reflect the lower raw material costs.”

Iron ore with 62 percent content delivered to the Chinese port of Tianjin was unchanged at $120.60 a dry metric ton yesterday, following a drop of 1.8 percent Nov. 20, the biggest decline since Sept. 24, according to data compiled by The Steel Index Ltd. The tax reduction may reduce marginal output cost supply by as much as $14 a ton, according to Macquarie. The larger, more efficient Chinese iron-ore producers would benefit from a preferential tax system that reduced their costs and kept rates high at the marginal mines, the bank said.

“The decision-making process will not be fast, especially with the distractions of a leadership change still ongoing,” Hamilton said. “If any changes to the tax system are made, we think it is unlikely that they would be applied universally to the whole industry.”

China raised the resources tax on six minerals in February, including iron ore, tin and molybdenum, to help conserve reserves in the world’s second-biggest economy. The tax on iron-ore production was raised to 80 percent of a base rate, from 60 percent, effective from Feb. 1, the official China Taxation News said. A reduction in tax would require a u-turn on this policy, Macquarie said.

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