On Friday, the Ministry of Commerce announced the scrapping of tax rebates for exports of coke, an essential ingredient of steel, and coking coal, the raw material used to make coke. The rebates ended beginning today.

Shu Chaohui, of the Industrial Policy Department of the State Development and Reform Commission, said approval for construction of new coke plants has been suspended to rein in rampant expansion in the industry. Within the next two months, the government will also release stricter standards for new producers entering the industry.

"Production capacity is growing too fast and the risk of a market glut is looming large," said Shu last week at the annual meeting of the China North Coke and Chemical Association.

China's coke consumption has been surging since 2002 to feed robust steel production. The current domestic coke price is more than double that of 2002.

Strong market demand has spurred coke producers, such as those in north China's Shanxi Province, to rush to raise producing capacity.

At present, 183 coke ovens are being constructed. They will have a combined production capacity of 68 million tons, according to the association. Capacity of the plants under construction will account for nearly 40 percent of the current production in China, and more projects are being planned.

Coke production capacity in China will exceed 260 million tons by 2005, accounting for about 60 percent of the world total, according to Hua Zugui, chairman and CEO of China Coal & Coke Holding Ltd.

Shu said the rapid production expansion is risky since demand for steel is likely to ebb under government pressure to cool the fever in the steel industry. Government control of coke exports would also shrink the market for additional production.

Hua said excessive expansion would lead coke producers to scramble for coking coal resources, exhausting limited reserves and pushing up production costs. Moreover, expansion would place greater strain on an already tight transport situation and cause serious air pollution.

While working on curtailing the industry's expansion, the government is also moving to crack down on obsolete and polluting beehive coke ovens, which now account for a quarter of China's total coke production.

Inefficient beehive ovens waste coal resources and pollute the environment by emitting coal gas and smoke into the air, while advanced slot ovens use coal gas to process chemicals.

Shu said the commission completed an investigation into beehive coke ovens last month. Nine government institutions then submitted a joint report urging the State Council to take action to close the ovens down.

On the export front, China has scrapped tax rebates for coke and coking coal starting today to further reduce exports.

Traders said the abolition of the subsidy would push the international coke price even higher as Chinese producers will raise export prices to cover additional costs and maintain profit margins.

China charges a 17 percent value-added tax for coke and 13 percent for coking coal. Exporters enjoyed 15 percent rebates for coke and 13 percent for coking coal until January this year, when China slashed the rebates to 5 percent for both products.

"The government now sends the message that it does not encourage the export of coke, which pollutes and is becoming scarce," said an official from a state trading company for coke products. "In the longer term, the government may even impose additional charges on exports."

China cut the export quota this year to 9 million tons, from 12 million last year, in response to soaring domestic demand. Exports dropped to 2.3 million tons in the first quarter of this year from 4.1 million in the same period last year.

To produce enough coke, China also imported 1.3 million tons of coking coal in the quarter, half of the full-year total in 2003.

China is the world's largest coke producer, accounting for half the world's supply in 2003.

The European Union has complained that China's restriction in exports has made the international coke price skyrocket. China and the EU are still negotiating the issue.

(China Daily May 24, 2004)