hina Takes a Hard Look at Its Steel Industry

Beijing and Companies Move Toward Lowering Taxes to Promote Consolidation and Cut Capacity By ROBERT GUY MATTHEWS BEIJING—Frustrated in previous attempts to consolidate its fragmented steel industry, China is working on a new way to promote mergers and reduce capacity, possibly giving a boost to other global steel companies. China has hundreds of steel mills, many of them small and inefficient. But the central government's desire to close small plants and consolidate the industry has been stymied at the regional level. Local government officials have resisted the potential loss of jobs and tax revenue. Steelmakers, meanwhile, have been kept in check by riots protesting planned plant closures. Under a plan being worked out, steelmakers' national tax bills would decline by year-end, with some of that money instead going to regional taxes, according to people familiar with the matter. That would soften the blow of closed mills by giving regional governments additional tax revenue to stimulate their economies, fund social programs and help find jobs for displaced steelworkers. The lower tax burden would also leave steelmakers with more cash for acquisitions. A significant cut to China's capacity would allow steelmakers elsewhere, especially in high-cost areas like Europe and North America, to keep supplies in check and prices high. Steel buyers—such as auto makers, equipment manufacturers and appliance companies—would be all but guaranteed to pay more. Substantial consolidation of the Chinese steel industry, which could take years, could also leave China in a better position to negotiate prices for iron-ore. China's attempts to negotiate with miners on prices for the key steelmaking ingredient were underminedthis yearwhen small Chinese mills struck side deals. Details on the tax plan are still being worked out by the Chinese Iron and Steel Association and China's central government in Beijing, said Wu Xichun, the association's honorary chairman. "The tax burden for Chinese steel makers is too high," Mr. Wu said. About 17% of revenue for Chinese steel makers goes to pay taxes, about triple the rate for U.S. steelmakers, he said. China has come under pressure from Europe and the U.S. to keep excess Chinese steel from flooding their respective markets. Trade cases have been filed in Europe and the U.S for a variety of steel products, such as reinforcing bar, pipe and rolled steel. The effects of China's tax plan could slow the volley of steel-trade cases involving China, though Western officials expressed doubt over China's efforts to close small mills. "Our fear and paranoia is based on what the Chinese have done in the past," such as flooding the U.S. with low-cost steel, said Thomas Danjczek, president of the U.S.-based Steel Manufacturers Association. China has the capacity to produce at least 610 million metric tons of steel a year—about 100 million more tons than it currently needs. The central government has said excess capacity has been permanently shut down. And the Chinese Iron and Steel Association has said the nation aims to use its steel output domestically, with railroad construction, automobile production and a wave highway projects mopping up excess capacity. The association noted that China already has reduced its exports substantially, to 4% of production through August from 12%-13% last year. European and U.S. steelmakers have raised concern that Chinese factories will restart once the world economy improves. Gordon Moffat, director general of the European Confederation of Iron and Steel Industries, said he doesn't believe China will consume all its domestic production or try to limit exports. "We don't want them to destroy our market," he said. The World Steel Association, which is meeting here to discuss the state of the industry, forecast that global steel use will contract by 8.6% this year from 2008, but that China's consumption will increase by 18.8%. The global trade group expects that growth in Chinese demand will slow to 5% next year, based on Chinese steel association forecasts, as support from stimulus measures wanes. —Chuin-Wei Yap contributed to this article. Write to Robert Guy Matthews at robertguy.matthews@wsj.com