China Seen Unlikely to Cut Taxes on Imported Coal

China is unlikely to cut the value-added tax on coal imports as such a move will only drive up international prices and in turn erase the price advantage of overseas supplies, traders and analysts said on June 7, 2011.

Local media reported that Beijing may cut the 17 percent value-added tax and port charges on imported coal to encourage more overseas purchases, as one of the moves to increase energy supplies to prevent a worsening of its worst summer power shortage in seven years.

But industry watchers said there was little incentive for Beijing to give importers such a boost, as the country was already well-supplied with coal, with most power stations holding coal inventories of around two weeks.

Any move to favour importers and discriminate against domestic suppliers, would not only have Chinese miners up in arms, but also encourage international coal prices to climb, which would in time cause imported shipments to lose their comparative price advantage, traders and analysts said.

"It is very unlikely that Beijing would go down that path," said Helen Lau, a coal analyst at UOB-Kay Hian in Hong Kong.

"What we have seen is probably more of a gesture to show the utilities sector that the government still has other administrative tools to manage coal prices."

China's coal imports in the first four months of the year shrank 24 percent from a year earlier to 43.5 million tonnes, as utilities shunned more-expensive supplies from overseas and focused on domestic coal instead.

A tax cut favouring imports could also lead angry Chinese miners such as China Coal and Shenhua Energy , to cut output, which could cause a shortfall in supply since 95 percent of China's annual 3 billion tonnes consumption still comes from domestic mines.

The current power crunch in China, which has forced a long list of provinces to ration power and factories to cut output, stems from excessively low power tariffs that has forced hundreds of utilities nationwide to cut generation.

"It is not a repeat of 2008 whereby utilities can't run because of a coal shortage. Besides, why should we subsidise imports and pour money at foreign producers?" said a Beijing-based coal trader.

Downpours over the weekend in central and southern China would also start to boost hydropower output, bringing relief to the country's current power shortage, which has been forecast to peak at as much as 40 gigawatt this summer.

Rebates, Power Tariffs

China levies 17 percent valued-added tax (VAT) on imported coal and port charges range from 33 to 36 yuan a tonne, in addition to storage cost of 0.10-0.80 yuan a tonne per day, traders said.

A more effective way to encourage imports would be to reduce port charges for buyers -- a move Beijing may be more inclined to take -- analysts said.

"The government can quietly offer some rebates to power plants for port or storage charges they have incurred. That way, it doesn't have to be headline-grabbing news that would encourage overseas prices to climb," said a coal analyst at an investment bank who declined to be identified.

Still, the most effective solution to China's chronic power woes lies in higher power tariffs in the near term as well as a comprehensive on-grid tariff reform in the longer term.

Analysts also poured water on speculation that Beijing might cut the 17 percent VAT tax on the coal sector nationwide as the loss of trillions of yuan in tax revenues would be too high.

"It would be a meaningless move since miners will be reluctant to pass on savings, so coal prices will remain high. The government would be the biggest loser," said Bonnie Liu, a commodities analyst at Macquarie Bank.