Iron ore price hike boosts restructuring
(Xinhua)
Updated: 2005-04-03 09:16

The 71.5 percent rise of iron ore prices on the world market puts great pressure on China, the largest ore importer in the world. On the other hand, it also provides a good opportunity for the country to restructure its overheated economy.

At Wednesday's executive meeting of the State Council, Premier Wen Jiabao underscored the necessity of strict control of China's economy and of improving the country's industrial structure to better cope with the rising cost of iron ore.

The State Council meeting called for an end to tax rebates on crude steel product exports. "For a long time some small-sized steel companies have been encouraged by the tax rebate income to import iron ore and export crude steel," said Professor Xu Zhongbo of the Beijing University of Science and Technology. "This has led to low efficiency, high consumption and serious pollution."

According to a circular issued by the Ministry of Finance and the State Administration of Taxation, tax rebates on some steel product exports ended Friday. The administration predicted this would lead to 7 billion yuan (US$843 million) in lost profits for Chinese steel companies.

"If the government ends the tax rebates, some of these high-polluting, low-efficiency local steel companies will have to close, and the domestic ore price will decrease due to drop of demand," he said, adding that the new policy was therefore conducive to environmental protection and resource conservation.

The Chinese government undertook a series of macro-control policies last year in a bid to cool down the country's overheated fixed asset investment. In April 2004, those in charge of an iron project in East China's Jiangsu Province that illegally used 436 hectares of farmland and received loans of billions of yuan were severely punished by the central government.

"The government has found the increased cost of iron ore to be a good opportunity to go on restructuring and continue cooling down the economy," Xu acknowledged.

"The current economic figures make the government worry about rebound of fixed asset investment, and the ore price soaring will dampen the investing enthusiasm in real estate and other industries that greatly need steel products," said He Jun, an analyst of the Bontex company.

In January and February of this year, China's urban fixed asset investment was still 24.5 percent higher than 2004, a higher rate than the government would like to see.

The Chinese government last year severely tightened land and money supply to slow down investment in real estate, but rising housing prices and huge profit potential are still attracting investors to this sector.

"Since steel is a raw material of housing construction, the iron ore price rise will certainly raise the total cost of real estate projects, and thus may shrink the profit gained by estate agents," said Du Meng, chief executive of a Beijing-based estate company.

Against this backdrop, if the government can make use of the price increase, the goal of conserving energy and resources and macro economic control may be better attained this year, according to the Beijing News.

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