On Friday, March 15, China government announced that the value added tax (VAT) will be declined from April 1. This rule is issued to support manufacturing and decrease the factory costs. VAT for manufacturing sectors changes to 13% from 16% which means 3% reduction.  For transportation and construction sectors, it reduces from 10% to 9%. But the 6% rate which applies to services will remain the same. Generally market participants are satisfied with the new regulation as it improves the demand of products although it may have negative influence on prompt cargo sales and stockpiling of this month. According to governmental officials VAT cuts will improve the economy in the place of broader stimulus spending, as the government tries to decline the country’s debt exposure.

According to steel mills, VAT cuts will affect on Chinese demand for steel and raw materials though incremental demand improvement for steel wouldn’t be seen until the second half of this year. The new VAT will apply for iron ore cargoes that will arrive from April 1 so iron ore import costs will decline from next month as a result. Many buyers stopped purchasing seaborne iron ore cargoes and are postponing their procurement to April for better rates. Steel factories that are not in urgent need of iron ore prefer to wait till April. If we consider the current flat rate of iron ore, VAT cuts will reduce the iron ore prices 20 Yuan per MT which is equal to 2.6 $ per MT. With current thin steel margins, this rule is very beneficial for steel mills because it reduces the rate of iron ore as their main raw material for steel production. On the other hand, it will be very difficult to sell seaborne iron ore cargoes which arrive on March. Plans have demonstrated that VAT cuts will cost the government 1 trillion CNY ($161.2 billion) in tax revenues, but Beijing is trying to reinforce its economy and boost long-term growth, so the government is willing to take a hit in tax revenue in the short term.

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