China will start to ban iron and steel processing trade on May 19, the Ministry of Commerce told China Daily Wednesday.

The measure means that processors in China will be prohibited from making goods for overseas clients with imported iron ore, pig iron, steel scraps, billets or ingots provided by overseas clients.

The iron and steel processing trade in China is now free from tariffs and value-added taxes on material imports and finished product exports.

"The measure is in line with the State's macro economic controls and the related industry's development policy," the ministry said in a statement.

Starting from May 19th, China will also ban rare earth and phosphorite processing trade.

The ban of iron and steel processing trade is the third consecutive action taken by China within less than two months to tame the nation's skyrocketing steel exports.

On April 1, China removed a 13-percent tax rebate for steel billet and ingot exports.

The nation slashed the tax rebate for exports of some steel products to 11 percent from 13 percent on May 1.

Analysts said the latest measure is mainly designed to plug the loophole created by the removal of the tax rebate on steel billet and ingot exports.

"Many small steel makers in China turned to the processing trade after the export tax rebate was removed," said Qian Yi of Shanghai Steelhome Information Technology Co Ltd, a steel industry consulting firm.

The processing trade ban will have a big impact on small steel companies in China, Qian said yesterday in an interview with China Daily.

China's steel exports have been shooting up since last year thanks to higher international steel prices than in the domestic market.

The nation exported 5.19 million tons of steel products in the first quarter of this year, up 219 percent from a year ago,statistics from the China Iron and Steel Association showed.

China's steel billet exports also surged, up 971 percent year-on-year to 2.86 million tons during the same period.

"The iron and steel processing trade ban is the government's attempt to further control steel demand, from both domestic and overseas markets, to prevent a resurgence of overheating investment in China's steel sector and excessive steel production," said Zhou Xizeng, an analyst with CITIC Securities Co Ltd.

Both profligate investment in the steel sector and steel demand in China have been cooled by the State's macro economic controls.

Fixed asset investment in the sector tumbled by 1.4 percent year-on-year to 33.22 billion yuan (US$4.01 billion) from January to March this year.

The tumble is in sharp contrast to the whopping 106.4 percent year-on-year growth in fixed asset investment in the sector in the first quarter of 2004.

Zhou said investment in the steel sector will continue to decline this year due to the ban on iron and steel processing trade.

Domestic steel demand rose by 9.79 percent to 83.31 million tons in the first quarter of this year from the same period last year.

The demand growth was down from 13 percent in 2004 and 25.8 percent in 2003.

Analysts said the ban is also an effort by the government to save energy and resources and ensure the sustainable development of the energy-and-resource hungry steel sector.

Energy-saving will be one of priorities of the steel sector's future development, according to the draft of a national policy for the sector.

The steel policy, the first of its kind in the People's Republic of China, is expected to be finalized and issued in the coming months.

The steel association predicted earlier that China's iron ore imports would increase to 240 million tons this year from 208 million tons last year, despite a recent 71.5 percent hike in international iron ore prices.

China has been the world's No 1 steel producer since 1996, with output this year forecast to reach 300 million tons.

(China Daily May 12, 2005)