China's VAT cut to have mixed impact on domestic aluminum sector

  • Tuesday, March 19, 2019

  • Keywords:VAT, cut, impact
[Fellow]China's VAT cut to have mixed impact on domestic aluminum sector

[]China's value added tax cut is expected to have a limited impact on bauxite mining, while a greater impact is expected downstream on the alumina refining, aluminum smelting and processing sectors, Chinese sources said Monday.

China said Friday that it would cut value-added tax to 13% from 16% effective April 1, with the aim of stimulating manufacturing and lowering companies' costs.

Jinan-based brokerage Luzheng Futures said in its March report that the upstream mining sector's costs subject to VAT mainly include fuel, explosives, and auxiliary materials, with its major costs such as labor, the resource tax, and depreciation VAT-free, meaning the cut would not boost its profits much.

However, in the intermediate sectors - alumina and aluminum smelting -- over 80% of costs are subject to VAT. Further downstream in the aluminum processing sector, feedstocks on which VAT is levied account for over 90% of total costs, so the cut would likely boost profits more, the brokerage said.

Chinese sources saw the VAT cut as favoring aluminum-product imports.

Shandong-based Qilu Securities in its weekly report said the VAT cut could reduce the cost of importing some types of aluminum items, scrap in particular.

It said the VAT cut would have limited impact on domestic scrap but a greater impact on imported scrap as domestic aluminum scrap is VAT-exempt, while the VAT cut would trim the costs of importing scrap. China has set a national recycled aluminum rate of 40% by 2020, up from 22% in 2008, according to the China Nonferrous Metals Industry Association.

On the export side, Chinese analysts said assuming an export rebate for aluminum sheet and strip unchanged at 13%, the VAT cut should help raise China's competitive edge in exports of low-end aluminum products.

Chinese analysts are also predicting a physical transfer of metal inventories after the VAT cut.

According to Shanghai Dongzheng Futures, lower VAT could result in metal stocks being repositioned. It said that any faster flow of metal cargoes from Chinese bonded warehouses into the country could raise domestic supply and be bearish for Shanghai Futures Exchange contracts further along the curve.

Aluminum stocks at Shanghai Futures Exchange's various bonded warehouses in China were 546,508 mt on Monday, down 1,632 mt from Friday, SHFE data showed.

China Nonferrous Metals Industry Association predicted the VAT cut would help the transform the mainland's metal sector, providing funds for acquisitions, mergers, and the purchase of production facilities.

(S&P Global Platts)

  • [Editor:王可]

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