China cuts resource tax to keep afloat iron ore miners

China, the world's biggest steel producer, has made a significant cut in resource tax, in its efforts to shore up the country's ailing iron ore mining industry, as global prices for the commodity nose-dive.

A cabinet meeting headed by the country's prime minister Li Kequiang has decided to reduce the tax on iron ore by 60 per cent, effective 1 May. This will be about 6 yuan ($0.97) per tonne of iron ore.

The government action is aimed at improving the operations of mining companies, promote structural adjustments, support development and upgrading of related industries and ensure reliable ore supplies, according to a release issued after the meeting.

Current tax rate on Chinese iron ore mining is 30 per cent which is one of the highest in the world, compared to 8 per cent in Australia, and below 10 per cent in several countries.

"It's very unreasonable, given the collapsed prices. The new tax rate will greatly reduce the burden on the sector," Li Xinchuang, deputy secretary-genearl of China Iron and Steel Association said.

China imported around 78 per cent of its total requirement of iron ore last year, up about 10 per cent from the previous year.

Iron ore prices plunged to their lowest level of $46.70 a tonne last week, since the benchmark index records began in May 2008, a 58-per cent fall from around $112 a tonne a year ago. Yesterday, iron ore was traded at around $47.90 a tonne.

The global glut in iron ore has forced many high-cost miners out of the market with big, low-cost miners like BHP Billiton, Rio Tinto and Vale surviving the price plunge.

The move shows how the Chinese government is keen to keep its domestic miners afloat by providing tax subsidy and compete with global rivals.

According to industry association estimates only a quarter of the miners are able to churn out a profit at current price levels.

Smaller miners are either closing down or slashing production, while the global big three are expanding their capacities and axing jobs to reduce costs further.

However, analysts believe government subsidies would only make the situation much messier and more protracted.

The subsidies will sustain domestic production, increase the global supply of iron ore and low-cost producers could face a prolonged period of low iron ore prices.

Latest forecasts from Credit Suisse indicate an average price of $51 a tonne in 2015 and $48 a tonne next year, much lower that its earlier prediction of $70 for 2016.

The new subsidy has come as a blow to Australian producers hoping to survive long enough to replace higher-cost Chinese producers.

BHP and Rio have rejected calls by Fortescue and others to cap production and halt their expansion plans, arguing that if Australian companies did not produce the ore, other competitors would fill the gap.

In December, Western Australia, which produces the bulk of Australian iron ore, announced a temporary 50-per cent royalty relief to junior miners for 12 months.