NEW YORK (TheStreet) -- China's decision to scrap export rebates on steel will benefit U.S. steel companies, encourage consolidation in China's steel industry, and lower iron ore prices during 2010.

Beginning July 15, China will remove rebates on hot-rolled coil and cold-rolled coil and galvanized products. Current rebates for hot-rolled coil and cold-rolled coil are 9% and 13%, respectively.

The decision came ahead of the G-20 meeting amid growing pressure from trade partners, the U.S. and Europe on dumping and other trade measures.

In recent months, China's steel imports resulted in a build-up of inventories in the U.S., slowing down sales of domestic steel mills. During May, China's steel imports surged 21.6% month on month to 47,579 tons from 39,127 tons in April.

Chinese steel imports account for around 6% of U.S. steel production. The price for hot-rolled coil is around $600 a ton and the removal of the rebate may push prices up by $50 a ton, damping China's steel industry competitiveness in the global markets. U.S. hot-rolled coil prices gradually declined to $645 per ton on July 6 from a recent peak of $720 a ton in May.

Revoking export rebates will likely reduce China's steel imports, benefiting American steel companies. Nucor ( NUE) and Steel Dynamics ( STLD) will be among the major U.S. steel producers to gain from this policy decision by China, since these companies earned more than 95% of their 2009 revenue from the domestic market.

In comparison, the U.S. accounted for 73% and 81% of the 2009 revenue of U.S. Steel ( X) and AK Steel ( AKS), respectively. In addition to the removal of the steel export rebates, the U.S. steel industry requires production cuts and lower raw material costs.

China's decision to cancel export rebates will squeeze the profit margins of domestic steel mills. The government's steps to cool the property market and revaluation of the yuan are already dragging steel demand and hampering competitiveness of the industry.

Chinese steel mills cut production in June due to sagging domestic demand. Declining steel prices and soaring raw material costs have exacerbated the woes.

Some domestic steel producers may report potential losses during the second half. Several small players with short-term financial strain will be attractive bargaining opportunities for large players.

Iron ore spot prices could decline during the second half due to the slowdown in China's steel production, in addition to the efforts made by China's steel mills to lower dependence on the three mining giants, Vale ( VALE), BHP Billiton ( BHP) and Rio Tinto ( RTP).

Seaborne iron ore prices surged 90% during the second quarter impacting AK Steel severely, as the company did not account for higher iron ore prices for the second-quarter order book.

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