China may use export taxes to cull own industries

China, which helped its heavy industry survive the financial crisis by lowering barriers to exports, is now considering hitting the same exports with a tax to discourage rampant production that uses too much energy.

Fan Jianping, a top government analyst, said China is likely to impose export taxes on steel and base metals and their products in the next five years and classify them as industries serving domestic consumption. The goal would be to limit production capacity and to cut energy use and carbon emissions.

"Before 2015, the policy would be implemented," Fan, chief economist and director general of the Economic Forecasting Department of the State Information Center think tank, told a lead and zinc trade summit in Chengdu in Sichuan province.

That would be a U-turn in China's treatment of its swollen steel sector, by far the world's biggest, and its inefficient aluminium producers, who struggle to match leading firms such as Rio Tinto on production costs.

Those sectors got a huge leg-up in the first half of 2009 as the government encouraged steel consumption and directly bought base metals such as aluminium, as well as granting value-added tax rebates on exports.

Last week the government said it would cut and scrap some rebates on exports of steel and most base metals and semi-finished products made from those metals from July 15, lessening state help for the first time since the financial crisis triggered China's huge stimulus plan 18 months ago.

Fan said the government believed the rebate cuts would cause little pain since the companies involved had made huge profits in the first five months of the year, and the cuts, which signalled a tougher stance on phasing out outdated production facilities, would continue.

The government has repeatedly vowed to crack down on overcapacity, threatening to withdraw loans, outlawing expansion and advocating a wave of consolidation that will leave only a few big players in each industry.

Steel has been the most egregious offender, with thousands of small mills defiantly ramping up production and resisting efforts to shut them down or roll them into bigger rivals.

That has enraged the China Iron & Steel Association, which last year failed in its efforts to win a favourable iron ore price from global miners, partly because China's apparently booming demand undermined its claim to a lower price.

While unfettered steel production ballooned, China had much more success cutting back on another huge industry, coal.

By closing small coal mines in hope of improving efficiency and safety, China has turned into a net importer of the fuel since the start of 2009, a massive boon to the global coal market and a fillip for shippers suffering from the economic slowdown.

It also helped cut down on exports by imposing a 10 percent export tax on coal at the end of 2008, and almost entirely turned off the flow of coke, a steelmaking ingredient, with a 40 percent export tax at the same time.

Fan said the new export tax policy was part of efforts to limit capacity of high-energy and high-emission industries for which coal and coke are needed, and would be included in China's next five-year plan, which runs from 2011 to 2015.

"Coal, coke and minerals, （we） are not going to sell （overseas） any more. China is going to use them," Fan said.

China should export high value-add finished products like automobiles and ships instead, he said.

China set a target of cutting the energy intensity of its economy by 20 percent in the current five-year plan, which ends this year, but that now looks a hard target to meet. After falling for four years, energy use shot up in the first half of this year because of expanded production in high-energy industries.

If that continues, China's risks breaking its promise, made during last year's Copenhagen meeting, to cut carbon dioxide emissions per unit of GDP in 2020 by 40-45 percent compared with 2005 levels. Therefore investments to the industry have to be limited, Fan said.

"This is quite likely to happen and it is cheering that the Chinese government is so determined to shut down inefficient capacity by discouraging exports of high-energy products," said Standard Chartered commodities analyst Judy Zhu.

But she was cautious about assuming this policy would succeed in crimping the steel sector.

"It may not be easy to achieve the intended effect as most steel output still goes to the domestic market," she said.