SHANGHAI, Feb. 17 (SMM) -- China’s Ministry of Finance and State Administration of Taxation issued the “Notice on Adjustment of Resource Tax Rate for Tin Ore and Other Ores” recently, raising the resource tax rates for iron ore, tin ore, molybdenum ore, magnesite, talc, and boron. The original tax rate for iron ore was 60%, and the rate will be 80% after the adjustment. According to the Notice, the average resource tax rate at key mines is raised from RMB 10.72/mt, to RMB 14.29/mt, up RMB 3.57/mt, while the average resource tax rate at non-key mines is hiked from RMB 9.67/mt, to RMB 12.89/mt, up RMB 3.22/mt. For example, the average grade of run-of-mine ore at private mines in Tangshan City is about 20%, and one mt of iron ore concentrate (66% Fe content) requires at least 3.5 mt of run-of-mine ore. One mt of iron ore concentrate needs additional taxes of RMB 9.8/mt based on sixth grade ore at non-key open pit mines (need to be further processed at beneficiation plant).
The Chinese government has made an amendment of resource tax for iron ore in November 2011. According to the new regulations, taxpayers exploiting or producing taxable products that are used for the continuous production of taxable products do not pay resource tax; taxpayers exploiting or producing taxable products that are used for other purposes, which is regarded as sales, are subject to resource tax. However, the regulations do not modify the tax rate, and the 60% tax rate is unchanged in nearly 20 years since the 1994 amendments. Steelease believes the tax rate change is within expectations, but such move makes current iron ore market even worse.
Sources report that various taxes and fees including resource tax have been raised by about RMB 20/mt in Chaoyang, Liaoning Province since February 9th, with current resource tax for iron ore concentrate at RMB 147/mt. In addition to taxes, mining and beneficiation costs have also been steadily rising recently. The Chinese government raised electricity prices by RMB 0.03/kwh in December 2011, helping increase electricity costs for iron ore concentrate by about RMB 1.8/mt if one mt of iron ore concentrate needs 60 kwh of electricity. The Chinese government also raised gasoline and diesel prices by RMB 300/mt on February 8th, 2012, an increase of RMB 0.26 per liter. Supposing one mt of iron ore concentrate needs 3.32 liters of diesel and 3.5 mt of run-of-mine ore, diesel expenses will increase by at least RMB 3/mt. In this context, only resource tax, electricity fee and diesel expense have already added at least RMB 14.6/mt for total production costs for iron ore concentrate.
However, steel mills only purchase iron ore on an as-needed basis given weak steel markets. In addition, imported ore prices remain lower than domestic ore prices, and steel mills increase the proportion of imported ore consumption in response, further reducing demand for domestic ore. Therefore, although iron ore cost increases significantly, mines face difficulties in passing cost pressures on steel mills given current weak iron ore market. In addition, mines and beneficiation plants in Liaoning and Inner Mongolia have not fully resumed production due to rising costs and weak market. In this context, resource tax rate rise and increased other costs will promote the restructuring in China’s mining industry.