China’s Export Tax Bombshell Rocks Aluminum Market

The market reaction has been to open a financial arbitrage window to facilitate continued flows of aluminum product from east to west.

SEATTLE (Scrap Monster): China’s announcement that it will end tax rebates on exports of aluminum semi-manufactured products caused market mayhem on Friday and may have major long-term ramifications for the global aluminum supply chain.

The Shanghai price sank and the London price surged as traders factored in the potential annual loss of over 5 million metric tons of Chinese products in the international market.

That’s a worst-case scenario and the reality may turn out to be less dramatic, depending on how China’s aluminum processors cope with what for many is a loss of vital income.

The Ministry of Finance’s elimination of the 13% VAT refund effective Dec. 1 also applies to exports of copper products.

China’s shipments of copper products are not insignificant at around 700,000 tons a year but aluminum volumes are on a different scale.

The country’s exports of semi-manufactured products such as bars, sheet and tubes totalled a massive 5.2 million tons in 2023. They will be higher still this year. Outbound shipments grew by 17% in the first nine months of 2024.

Just about all of that tonnage qualifies for the VAT refund, which acts as a financial life-line for many smaller product manufacturers in a ferociously competitive market.

There will be a predictable rush to export before the Dec. 1 deadline and those processors that can will no doubt look to pass on some of the cost hit to international buyers.

The market reaction has been to open a financial arbitrage window to facilitate continued flows of aluminum product from east to west.

The most likely outcome is a sharp drop in export volumes next year followed by some stabilization as exporters adjust to the new financial reality. This is what happened to galvanized steel exports after the authorities eliminated the tax rebate for plate and sheet in 2020.

Much, though, will depend on Chinese processors’ ability to operate without the VAT lifeline.

China’s mid-stream aluminum processing sector is plagued by over-capacity with utilization rates typically below 65% and as low as 40% in some sectors, according to research house AZ Global.

Not everyone is going to survive.

Courtesy: www.mining.com

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