Reducing VAT in China will lead to increased demand for steel

China's announcement that April 1 will be the date for the introduction of a value-added tax cut aimed at stimulating manufacturing activity and reducing production costs for companies has generated a positive reaction from commodity market participants.

Beijing unveiled a stimulus policy on March 5, including a VAT cut in manufacturing to 13% from 16%, and in the transport and construction sectors to 9% from 10%.

Overall, market sources were bullish after the announcement, saying it boosted confidence in Beijing's stimulus measures, although some traders said the impact had already been factored into benchmark prices.

In addition, some noted that this could have a negative impact on the fast sales of goods and their accumulation this month.

“Overall, the anticipated stimulus programs announced by Prime Minister Li will help improve the business environment and boost demand for petroleum products, especially gasoline and diesel, and car sales in China,” said Kang Woo, head of S&P Global Analytics Asia. ...

The thermal coal market will benefit from a VAT cut from 3 percentage points to 13% as it will help lower costs for end users such as power plants as China aims to cut electricity prices for industrial use by 10%, traders said.

“The tax is included in our expenses, so now marine coal traders will also be able to reduce their offers to Chinese buyers after the cut,” said the Singaporean coal trader.

A VAT cut for manufacturing could boost demand for steel and raw materials in China, although the increase in steel demand will not be seen until the second half of 2019, executives at Chinese steel mills and Australian iron ore companies said.

Manufacturing accounts for about 29% of China's GDP, as well as about 30% of the country's steel consumption, according to the National Bureau of Statistics.

The offshore iron ore cargo is expected to become more competitive in the short term, the sources said. The new VAT will apply to iron ore shipments arriving in China from April, and end users are postponing some sea purchases until April to cut costs.

“Given the current fixed price level, this means that in April prices for imported iron ore will fall by 20 yuan per tonne or $ 2.6 per tonne,” a source in Hebei said. "Mills without urgent needs would prefer to wait until April to restock."

“Shipping for the March arrival will be harder to sell after this news,” said a Singaporean trader.

In other metals markets, according to traders, declines