China moves to shore up miners with tax cut

China has cut the resources tax it charges its iron ore miners in an effort to support an industry struggling under an onslaught of cheaper and better-quality ore from Australia and Brazil.

The resources tax on iron ore, which is a percentage of value rather than a flat rate, will be lowered to 40 per cent of its original level starting May 1, China's State Council said late on Wednesday.

About three-quarters of China's iron ore miners are losing money at current prices, according to industry association estimates, although political pressure from local governments makes it difficult for the companies to suspend production or lay off workers.

"This move is part of a broader theme in China where we are seeing state assistance to help struggling coal producers and some aluminium smelters for social or other reasons," said Daniel Morgan, commodities analyst at UBS. "It suggests smaller producers in the rest of the world will have to cut production to fix the oversupply problem in the iron ore market."

The lower tax rate will reduce mainland Chinese miners' costs by Rmb10-Rmb25/tonne on ore of quality equivalent to standard imports from Australia, according to estimates by Citi analyst Ivan Szpakowski in Hong Kong. Nonetheless, he said, that will leave Chinese-produced ore still more expensive than imports.

For overseas miners, especially in Australia where huge capacity increases have come online, the reduced taxes in China could prolong a bruising period of low prices.

According to people in Beijing familiar with matter, the Western Australian government has made a series of overtures to Beijing to ensure Chinese conglomerate Citic does not close down its large and lossmaking Sino-Iron project, a major taxpayer.

The state government recently introduced a royalty relief scheme aimed at helping junior miners to cope with a fall in prices that means most are producing at a loss.

BC Iron, a Perth-based miner, said last week that the government scheme would defer A$8m-A$10m in royalties for up to two years.

Prices of iron ore - the main ingredient in steel, and Australia's top export - have fallen 70 per cent since peaking at roughly $190 a tonne in February 2011.

That has piled pressure on a host of small Australian miners, which rapidly expanded production during a decade-long mining boom driven by China's rapid economic growth.

On Tuesday, Australian miner Atlas Iron requested a suspension of trading in its shares while it reviews its operations and capital, as well as proposing asset sales "in light of the recent rapid fall in the iron ore price".

Last month, Fortescue, Australia's third-biggest iron ore producer, scrapped a $2.5bn bond and refinancing, blaming the fall in iron ore prices and jitters in capital markets.

The fallout in the sector has opened a bitter debate in Australia between the two biggest producers Rio Tinto and BHP Billiton and their competitors. BHP and Rio have rejected calls by Fortescue and others for a halt to their expansion plans, saying that would enable other international producers to fill the gap.

Due to their lower cost of production, Rio and BHP have remained profitable in spite of the fall in iron ore prices.

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