SHANGHAI, Apr. 10 (SMM) - China’s State Council cut the resource tax on iron ore to just 40% of the statutory rate, effective May 1, down from the current 20% discount, following the April 8 meeting of its Standing Committee. The move equates to a RMB 17/mt reduction in the tax burden borne by the sector. Meanwhile, power prices have also been cut RMB 0.018/kwh, affording iron mines another RMB 2/mt in cost savings. Nonetheless, these cost reductions remain insufficient to cover the current RMB 100-200/mt loss margins at most mines.

China instituted its iron ore resource tax in 1984. The tax rate was adjusted to between RMB 2/mt and RMB 30/mt in 1994, depending on mine type and ore grade. The iron ore resource tax was lowered in 2002 to 40% of the statutory rate, raised back to 60% of the statutory rate in 2006, and then 80% in 2012.

The iron ore resources tax is now levied based on metal weight, calculated as the resource tax rate multiplied by the concentration ratio. SMM’s cost database, covering300 domestic mines, for Q1 2014 shows domestic ROM grades averaged 26%, concentrates grade at 63%, and a concentration ratio of 4.2. Mines thus paid RMB 34/mt in resource tax, 6.3% of total costs (wmt, excluding VAT). After the tax adjustment, costs are expected to fall RMB 17/mt. More than ten tons of extremely low grade magnetite (Fe≤ 14%) is needed to yield one ton of concentrate in Chengde, so RMB 35/mt in resource tax expense will be saved with this newest rate adjustment.

While the State Council’s adjustment of the resource tax is an encouraging development, local governments still levy other taxes and fees that can add up to as much as RMB 55/mt at the 300 mines in our cost database. Local levies thus account for 10.3% of total costs. Though some local governments have reduced such levies or allowed for delayed payment, some struggling mines have still been forced to sell off concentrate stocks at a substantial