Chinese Fastener Prices Poised to Jump If Government Drops Export Tax Rebate

John Wolz

Insiders say the Chinese government export rebate to fastener manufacturers will drop July 1, leading to higher prices for fasteners shipped to other countries. The exact rebate change and date are “uncertain,” but some suppliers are “voiding” price lists until the change is officially known.

Combined with increasing ocean and Intermodal freight rates plus domestic freight rates, energy costs, steel prices rising 10% to 20% this year and the change in the value of the U.S. dollar, imported fastener prices can be expected to jump in the next few months.

“Our inside information is that the rebate will drop from 13% to 5% not later than July 1st,” J.P. Park, director of purchasing for XL Screw, told FastenerNews.com. “That is not official from the Chinese government,” Park emphasized. Thus a fastener exported by a Chinese manufacturer for $1 would yield a 5-cent tax rebate instead of 13 cents. “All of a sudden 8% will disappear,” Park explained.

Barry Porteous of Porteous Fastener Company explained that the VAT rebates have been in place for years and various products have differing percentage rates that the government pays to the exporter as a “kick back” to encourage exports.

Fastener manufacturers are shipping their inventories as fast as they can in anticipation of a July 1 change, one source said.
Once the Chinese government takes action, the “free market will come into play” on pricing, Park said. China’s manufacturers may raise prices 6% to 10%.

Other countries may use the opportunity to become more competitive with the Chinese by holding their prices or may try to take advantage of the higher prices to raise their own prices.

“Taiwan is hungry for business,” Park observed. “Taiwan would love to get business back from China. Taiwan prices are close enough to China that the rebate change could make Taiwan competitive – especially in small screws.”

Bruce Darling, vice president for materials at Porteous Fastener, noted that other countries cannot just ramp up production. “The capacity is extremely limited in Vietnam, Thailand and Malaysia and most have to import wire rod for their production. Local steel mill quality will not meet U.S. quality demands,” Darling explained. “The export tax recently placed on China steel exports increases the cost of imported steel for those countries. Developing countries also have a freight disadvantage due to fewer containers shipping to the U.S., Darling added.

India has “outdated equipment and an economy that is slow to react to market opportunities,” Darling pointed out. “Lately the India steel cost has not been competitive against the Chinese producers.

Another scenario is that the rebate change could make exports less competitive and thus reduce demand for Chinese steel. That could “stabilize” steel prices and at least partially offset the rebate loss, Park explained.

Ocean freight rates are putting pressure on prices too. Though XL Screw is operating with a freight contract, Park said he is “hearing of increases of $200 to $300 per container.” �2007 FastenerNews.com