China to cut iron ore tax in new blow to glut-hit prices

China has moved to prop up its struggling iron ore industry by slashing taxes, potentially expanding a global glut and undermining a strategy by mega miners to drive out high-cost competitors.

Brazil's Vale and Australian miners Rio Tinto and BHP Billiton have sought to drive out higher cost and less efficient miners in China, to make way for a flood of new production.

But China's cabinet said on Wednesday that it would cut the tax it collects from domestic iron ore producers by half to 40 per cent of the base rate from May 1, acting to help miners that have been chalking up losses as global prices plummet.

"Providing this tax subsidy means the Chinese miners will continue to produce. If that is the case, the strategy of the top three suppliers of pushing high-cost Chinese supply out of business will not work," said Helen Lau, mining analyst at Argonaut Securities in Hong Kong.

Iron ore has been in near freefall for more than two years, dropping 25 per cent since February alone to below $50 a tonne last week to its lowest level since The Steel Index <.IO62-CNI=SI> began compiling prices in 2008.

The action by China shows how despite pledges to slim down inefficient sectors, Beijing appears to be prepared to do what it can to keep some domestic miners afloat.

"In order to improve the operating environment of iron ore enterprises, promote structural readjustment, support the integrated development and upgrade of upstream and downstream sectors and ensure state resource supply security, the meeting decided from May 1 to cut the proportion of iron ore resource taxes that are collected, and collect 40 per cent of the stipulated tax burden," the country's State Council said.

Some industry sources say, however, that Beijing is unlikely to come to the aid of very small, loss-making miners.

Loss-Making Mining Capacity

China's resource tax is among the highest in the world and compares to a tax of around 8 per cent in Australia.

Three-quarters of China's iron ore mining capacity is operating at a loss and capacity utilisation rates at small mines dropped to as low as 20 per cent at the end of last year, Yang Jiasheng, chairman of the Metallurgical Mines Association of China, said last month.

Ore from China's more than 4,000 mines on average contains less than 30 per cent iron, compared with Australian and Brazilian ores that typically have close to twice that.

Both Rio Tinto and BHP were counting on some 85 million tonnes of Chinese domestic production to exit the market this year. But the estimate did not take into account any subsidies.

"Iron ore has become a supply story and anything that keeps supply in the market is detrimental to the price," said Morgans Financial analyst James Wilson.

Morgan Stanley estimates a hefty supply surplus persists despite more than 210 million tonnes of capacity globally - 15 per cent of the total - being eliminated as of last month.

"Our model continues to report seaborne market surpluses of 50-200 million tonnes, restricting the medium-term price outlook to a narrow range of just $55-$65/tonne," the bank said in a report on Monday.

Vale, Rio Tinto, BHP and Fortescue Metals Group together added 234 million tonnes of iron ore in the past two years - five times yearly U.S. consumption - and intend to inject another 196 million tonnes by 2020.

A call by Fortescue Chairman Andrew Forrest last month for Australian producers to cap output to shore up the price was dismissed as anti-competitive by regulators and "harebrained" by Rio Tinto Chief Executive Sam Walsh.

COMMENT NOW