CHINA: Metals & Mining: Moving away from Export Orientation: STRONG BUY on Baoshan Steel
China's latest round of policy changes serves to evidence the government's desire to slow down Steel Exports. Note that the policy is not directed nor intended to slow down domestic consumption nor slow the domestic steel industry. This is evident in the government's policies which are aimed at removing the export subsidies.
The main policy points are:
1) Introduction of registered license system for importers of iron ore. The main requirements are that importers need to reach production scale on crude steel of at least 1 million tonnes and cannot resell iron ore to non-qualified steelmakers.
1)The effect of this is to reduce speculative trading in iron ore, which will help stabilize prices. This will also pressure small-size mills, the benefits and detriments of which will be touched upon momentarily.
2)Scrap Steel imports must now conform to regulated enviromental standards.
2)This will tie in with point one to provide more control over imports of steel industry inputs, contributing to price stability which will carry downstream (internally in this case).
3)Remove import tax waiver on steel-making raw materials (ie. iron ore, scrap steel, pig iron, billet, slab).
3)This will put downward pressure on mills and companies engaged in the low-end processing trade (ie. importing raw materials, leveraging the low cost labor, re-exporting semi or finished products).
4)Removed Export Tax Rebate of 13% on semi finished steel products.
4)Discourage export of intermediate products, which as we will discuss later, promotes high-end mills and producers.
5)Reduced Export Tax Rebate from 13% to 11% on finished steel products.
5)Coupled with point four, we see the government focusing on driving the domestic high-end market.
Rationale and Implications:
The immediate rationale for China to take these measures is the high cost of raw materials and fuel. Why this makes sense is that China's low-value added steel businesses are exporting at a loss relative to opportunity cost. To get your head around this: the demand in China is still ludicrously high, there is a shortage of supply and so raw materials costs are soaring. Now as in most any business models, the more high-end or refinement into your finished product the more value you are adding to it. In the current scenario, low end and small sized businesses have been leveraging China's cheap labor to produce en masse and re-export low value added products with small margins but at high quantities. So these companies are making money for themselves, but the real money to be made (opportunity cost) is going to high end manufacturers in other countries which take the semi-product and finish it. What China is seeking to do is keep that opportunity cost internal and realize it in their GDP. Second key point: the additional and possibly even more detrimental effect is to the Chinese economy as a whole (it is harder to measure this one) because due to the shortage of supply of raw materials, prices are fluctuating greatly and this is exacerbated by speculators who love to pour hot money into the Chinese markets (and the hot money always accumulates around fixed investments). With the new policies, raw materials supply and price should stabilize (not necessitating nor implying a decline).
In a long term view, this is a very early signal that China is shifting from a low end, labor intensive economy to higher end, value-added production.
Reccomendation:
China is putting downward pressure on low end and small sized manufacturers as this sets the stage for biggest gains by large sized high end mills and manufacturers with a domestic orientation.
Strong Buy: BaoShan Iron & Steel
The main policy points are:
1) Introduction of registered license system for importers of iron ore. The main requirements are that importers need to reach production scale on crude steel of at least 1 million tonnes and cannot resell iron ore to non-qualified steelmakers.
1)The effect of this is to reduce speculative trading in iron ore, which will help stabilize prices. This will also pressure small-size mills, the benefits and detriments of which will be touched upon momentarily.
2)Scrap Steel imports must now conform to regulated enviromental standards.
2)This will tie in with point one to provide more control over imports of steel industry inputs, contributing to price stability which will carry downstream (internally in this case).
3)Remove import tax waiver on steel-making raw materials (ie. iron ore, scrap steel, pig iron, billet, slab).
3)This will put downward pressure on mills and companies engaged in the low-end processing trade (ie. importing raw materials, leveraging the low cost labor, re-exporting semi or finished products).
4)Removed Export Tax Rebate of 13% on semi finished steel products.
4)Discourage export of intermediate products, which as we will discuss later, promotes high-end mills and producers.
5)Reduced Export Tax Rebate from 13% to 11% on finished steel products.
5)Coupled with point four, we see the government focusing on driving the domestic high-end market.
Rationale and Implications:
The immediate rationale for China to take these measures is the high cost of raw materials and fuel. Why this makes sense is that China's low-value added steel businesses are exporting at a loss relative to opportunity cost. To get your head around this: the demand in China is still ludicrously high, there is a shortage of supply and so raw materials costs are soaring. Now as in most any business models, the more high-end or refinement into your finished product the more value you are adding to it. In the current scenario, low end and small sized businesses have been leveraging China's cheap labor to produce en masse and re-export low value added products with small margins but at high quantities. So these companies are making money for themselves, but the real money to be made (opportunity cost) is going to high end manufacturers in other countries which take the semi-product and finish it. What China is seeking to do is keep that opportunity cost internal and realize it in their GDP. Second key point: the additional and possibly even more detrimental effect is to the Chinese economy as a whole (it is harder to measure this one) because due to the shortage of supply of raw materials, prices are fluctuating greatly and this is exacerbated by speculators who love to pour hot money into the Chinese markets (and the hot money always accumulates around fixed investments). With the new policies, raw materials supply and price should stabilize (not necessitating nor implying a decline).
In a long term view, this is a very early signal that China is shifting from a low end, labor intensive economy to higher end, value-added production.
Reccomendation:
China is putting downward pressure on low end and small sized manufacturers as this sets the stage for biggest gains by large sized high end mills and manufacturers with a domestic orientation.
Strong Buy: BaoShan Iron & Steel
posted by howa at
5/11/2005
