The Impacts of American Tax Cuts on China Steelmaking Industry Analysis



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14 March 18
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At about 2 a.m. local time on December 2, the U.S. Senate passed Trump’s tax reform bill as a result of 51 votes in favor and 49 votes against it.

This is the largest U.S. adjustment to the tax law over the past 30 years. The act reduces the corporate income tax from 35% to 20% and the personal income tax threshold to 12,000 U.S. dollars.

For this program, the United States is mixed to comment it, the parliamentary vote is also a slight advantage, we can see its impact on the United States itself still to be tested by time. However, as the core hinterland of the world’s largest economy and the global capital market, such a major tax reform policy of the United States will undoubtedly have a profound impact on the global economy and capital markets and therefore attract extensive attention. Against the U.S. plan to reduce taxes, other major economies, such as Germany, Japan and China, have all voiced opposition. The impact they see on other countries is negative. Since the U.S. tax cuts will have an impact on the global economy and the domestic economy, as an important intermediate product of the national economy, tax cuts will undoubtedly have an impact on the steel industry and the steel market. What is the effect? The following is our a brief analysis.

1. The overall will promote the global economic growth on the demand and have stimulated effect on bulk commodities worldwide.

The large-scale tax reform plan of the United States will greatly reduce the cost of domestic enterprises in the United States and further the recovery of the real economy in the United States. As the world’s largest economy, the accelerated economic growth in the United States will also contribute to the recovery of global economic growth. In addition, U.S. tax cuts on individuals will increase residents’ income, stimulate consumption, and stimulate the U.S. economy and global economic growth. In addition, following the formal passage of the Trump tax relief plan and its landing, the major global economies will inevitably follow up with a view to a possible round of global tax relief. This will have an overall increase in the overall global economic growth rate of more than harm. As the global economy grows, the demand for commodities will also grow further.

2. Will push the dollar stronger and a weaker China Renminbi that will have a negative impact on the steel industry.

Since the beginning of this year, the rebound of the China currency of Renminbi has largely benefited from the continued weakness of the U.S. dollar index. After Trump tax reform landed, the cumulative rate hike and contraction of the Federal Reserve, the pressure of RMB devaluation is far from being released. The future period of time, combined with the Fed’s rate increases and contraction, as well as the United States base economy continue to strength, the US dollar will show an upward trend, but taking into account the United States and other countries and regions will also tighten monetary policy, and the United States current regular account the scale of the deficit is huge. It is difficult for the U.S. dollar to rebound strongly next year. The renminbi will return to depreciation channel, the next one is likely to continue back to 1 USD dollar =7.00 RMB nearby.

On the one hand, a stronger USD dollar and higher interest rates will be more detrimental to rising prices of commodity-denominated by USD dollars commodities. On the other hand, since China has been an important factor in boosting the growth of global demand for bulk commodities, the devaluation of the China renminbi is unfavorable for the import of bulk commodities, which is not conducive to rising commodity prices.

3. Will adversely affect steel downstream industries, especially electromechanical and real estate, and then prime steel products.

1.)US tax cuts will have a negative impact on China’s exports of electromechanical products, which in turn will put pressure on the domestic manufacturing industry

The massive tax cuts by the U.S. government undoubtedly have the most impact on China’s manufacturing industry. China’s manufacturing industry has always been faced with “two-way squeeze.” In the low-end manufacturing sector, it has faced increasingly fierce competition from Vietnam, Indonesia, and India. In the mid-to-high-end manufacturing sector, opponent – EU, USA, Japan, Korea. After the U.S. tax cuts, the U.S. manufacturing enterprises in China will consider returning the United States. The United States will also use its influx of large amounts of capital to compete in the global manufacturing industry. A large number of factories may consider setting up factories in the United States. In the meantime, if the global wave of tax cuts really takes shape, the possibility of other foreign-funded enterprises leaving China will also increase, in addition to the U.S. businesses. All these changes will put pressure on the manufacturing industry in our country.

Exports of electromechanical products closely related to manufacturing account for more than half of China’s total export value. This policy of the United States will exert further pressure on the export of electromechanical products in China. In 2016, the export of electromechanical products in China dropped 7.5% over the previous year and is expected to stabilize this year. However, affected by this, next year exports of machinery and electronic products may continue to decline, due to the larger demand for steel for mechanical and electrical products, the decline in its exports will certainly lead to the decline in demand for steel.

2.)2. US tax cuts will have a negative impact on China’s domestic real estate market, real estate investment will be weakened.

If the United States borrows tax cuts to stimulate the economy, inflation will inevitably rise if the economy grows rapidly. As a result, the Fed will be more determined to pressure inflation. It would have hoped to raise interest rates three times in 2018. If the economic recovery exceeded expectations, more rate hikes would also be possible. In that case, it will force market interest rates to rise, which in turn will affect China’s market interest rates. At that time, the central bank will only have to passively raise interest rates. If it does not raise interest rates, there will be a great deal of wealth flowing out of profit and falling. If the exchange rate of RMB against the U.S. dollar breaks down to 1USD=7.00 RMB, the Chinese government will have to follow up with the reduction list and even further reduce the tax. The rate hike and shrink the financial sheets will be bad for China’s property market, and the stock market.

Under severe regulation and control of real estate and strict capital controls, there is very little chance of asset price bubbles in our country rupturing. With the continuous pressure exerted by the three major combos of the U.S. economy (rate hike + shrink financial sheets + tax cut), the bubble in China’s asset prices (especially housing prices) will continue to experience the pressure of passive contraction. Only the shrinkage in China is more manifested in the de-leveraging of the commercial banking system, and the most direct impact of deleveraging by commercial banks is the deleveraging of real estate.

Demand for steel for real estate construction is an important consumption channel for steel products. The fall in housing prices and the slowdown in real estate investment will correspondingly lead to weaker demand for steel products.


4. Impact on the steel supply side

1.) Negative for iron ore imports, but negligible in the case of high profits at steel mills.

As mentioned above, the probability of a continued weakening of the renminbi next year will be a big possibilty, which will be beneficial to the export of Chinese goods but will be unfavorable to the import of commodities such as iron ore and other commodities settled in Renminbi. However, In the case of high profits, this effect can be neglected. From January to October, China imported a total of 890 million tons of iron ore and estimated the import volume this year to be 1.06 billion tons. Driven by the high housing prices, China’s steel output will increase slightly next year. Under the impact of imported iron ore, the competitiveness and effective supply of domestic mines will decline. The replacement effect of scrap steel on iron ore is still limited, and it will take time for large-scale use of scrap steel. The release of capacity of foreign mines will slow down next year, and the output of steel in other countries or regions in the world will continue to rise. Therefore, China’s iron ore imports will not decline next year, is expected to maintain this year’s level, high-grade imported iron ore resources are still tight. Expected 62% grade Australian PB average annual price of 58 US dollars/ton, and does not rule out the possibility of soaring.

2.) The U.S. tax cuts will not change the Chinese government’s reform process on the steel supply side but are expected to relax moderately and at the same time encourage the release of large-scale production capacity.

The United States pursues a large-scale tax reduction policy aimed at reshaping the manufacturing industry. The pressure on China’s domestic manufacturing industry is unprecedented. To increase the competitiveness of manufacturing in China next year will be the top priority. And measures to improve the competitiveness of China’s manufacturing industry mainly include reducing the raw material costs and tax burden on enterprises, encouraging innovation and increasing industry concentration. The recent soaring prices of steel and other raw materials increases the downstream manufacturing costs. Stabilizing the steel and other basic materials markets will be an important task for the Chinese government next year. Than-expected results from the steel industry supplying-end reform this year has made the steel industry that will continue to supply-side reform, and environmental protection will be the development trend. “Cutting capacity” and “limiting production output” have led to higher pricing power of steel companies and an unprecedented increase in corporate profits. This is what the government hopes to see. However, the soaring prices of steel products and the soaring profits of steel mills not only adversely affect the industry’s structural adjustment but also hurt downstream manufacturing industry. If steel prices continue to rise next year, the government may encourage the release of large-scale production capacity, while the gradual price adjustment to implement differential policies.

The U.S. tax cuts will result in a modest devaluation of the Renminbi and a favorable export of steel products. However, as the domestic market is obviously better than that of other countries, the price of many products appears upside down and the domestic prices are higher than those of other countries. Therefore, exports of steel products will not be significantly stimulated. Expected next year, China’s steel exports will still maintain the momentum of decline, but the decline will slow down.

In addition, investment in the United States will be more attractive due to the U.S. tax cuts. Chinese steel companies may restart investment projects in the United States or consider the United States to invest and build factories. This will promote the transfer of excess capacity in China to other countries and reduce the pressure on the China domestic capacity to go production. However, the U.S. steel production itself is overcapacity and sensitive to Chinese companies’ investment or mergers and acquisitions. As a result, they are both more difficult and more risky, and will not form a rush trend.

5. Conclusion

The implementation of the U.S. government’s massive tax cuts has a bidirectional effect on the commodity markets such as steel. On the one hand, the growth of the U.S. economy and the global economy will help boost the global demand for commodities and contribute to the rise of commodity prices. However, a stronger U.S. economy will lead to a stronger U.S. dollar that will allow the dollar-denominated commodities such as iron ore Price down; On the other hand, the drop in monetary liquidity is not conducive to rising commodity prices, as both tax cuts and interest rate increases are concurrent. Based on the above two factors, the U.S. government’s massive tax cuts have little effect on the prices of bulk commodities. However, the impact of the U.S. tax cuts on China is considerable. Manufacturing is the first to bear the brunt of the pressure on exports. Second is the real estate and other asset prices will have a greater negative impact on real estate investment growth will decline. These two aspects will lead to a certain decline in the demand for steel.

Now that the price of steel in China has risen too fast, especially the price of rebar going up too much, the prices of rebar in many cities in China have exceeded 5,000 yuan/ton. The surge in the price of this wave is not supported by the demand side, Is entirely affected by the supply side. With the continuous release of supply and the end of environmental protection limited production, coupled with the weakening of the demand intensity, the steel market may turn down in the second quarter of next year, dropping sharply in China.

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Fiona.yu@sinowellmetal.com

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