SHANGHAI, Oct. 13 (SMM) -- China’s State Council announced that it will tax all resource products starting November 1st, 2011. The tax rate for coking coal was adjusted to RMB 8-20/mt, while taxes on other types of coal stood unchanged between RMB 0.3-5/mt.

Limited Impact on Coking Coal Producers

China's coking coal reserves are 280.3 billion mt, accounting for 23% of coal reserves, with fat coal, coking coal and other scarce coal resources only accounting for 12.81% and 23.61%. In recent years, under the context of over-exploitation of scarce coal resources, the Chinese government plans to implement conservation-oriented development policy concerning special and scarce coal resources, and strengthening the paid use of coking coal is considered as part of such policy.

Any effects on coking coal producers are limited. According to new resource tax policy, the tax rate for coking coal was RMB 8-20/mt, up from the previous RMB 0.3-5/mt. Costs for coking coal will increase by 1% at most based on current coking coal prices. Since current average gross margin at coal producers is approximately 30%, profit margin at related producers will reduce by about 3% after the implementation of new resource tax policy. As prices for prime coking coal are between RMB 1,500-1,800/mt, any cost pressures faced by coking coal producers are relatively limited. Even if the cost rises, higher tax rate can also be transmitted to downstream coke enterprises and steel mills, leaving little impact on overall coking coal sector.

Resource Tax Reform Makes Coke Industry Worse

The resource tax reform will make coke enterprises even worse. China’s excessive coke capacity will remain unchanged in the short term, but coking coal prices keep rising due to resource shortage, leaving coke enterprises on the brink of survival. In this context, small changes in the cost will make the survival of coke enterprises more difficult.

Steelease believes there is high possibility that coking coal producers will pass on higher costs caused by new resource tax policy to coke enterprises. Resource tax reform causes the price of coking coal to rise by RMB 15/mt, and if per mt of coke needs 1.4 mt of coking coal, coke costs will increase by RMB 21/mt, which will make coke enterprises worse.

In recent years, China continues to eliminate outdated coke capacity, but most small coke enterprises are private enterprises, which make the process of elimination slower, and the new resource tax policy may become the propellant for the integration of coke industry. In addition, domestic steel prices fell continuously recently, and steel mills will definitely hold purchase prices for coke lower in order to cut costs, with profit margins at coke enterprises becoming smaller as a result.

Limited Impact on Steel Mills

After the implementation of new resource tax policy, coking coal prices will increase by RMB 15/mt, coke prices will be up RMB 21/mt, and steel cost will rise by RMB 4/mt. The calculation is based on the assumption that upstream enterprises will completely pass higher resource tax on to downstream enterprises, but the effect of price transmission in the actual industry chain will be discounted, since coke and coking coal enterprises will bear some rises in costs. Therefore, any effects on downstream steel mills from the resource tax reform are relatively limited.