China tax to cut alloy exports, up aluminium premiums

Chinese exporters of unwrought aluminium alloy scrambled to cancel booked exports after Beijing announced a tax on them, and analysts and traders expect exports to fall sharply from September.

The decline in alloy exports will increase metal supply in the country but cut availability in Asia, which may may force overseas buyers to liquidate shorts on the London Metal Exchange hedged for the bookings and push up LME aluminium prices.

Falling alloy exports from China, the world's top aluminium producer and consumer, would also force buyers in Asia to switch to primary metal, possibly driving up premiums of the metal.

"Beijing is trying to restrict the export of energy and energy-intensive products as it attempts to improve efficiency and contain the expansion of energy-intensive industries," RBS Sempra economist John Kemp said.

"As a result, China's aluminium industry will expand more slowly in the next five years than it did in the previous five," he said, adding that the market could not rely on large-scale exports of unwrought primary and secondary aluminium.

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Beijing would impose a 15 percent tax on exports of unwrought aluminium alloy from Aug. 20, the Ministry of Finance said late Friday. The tax would apply only to those that are exported under normal trade, meaning the alloy is made by local materials.

The ministry did not mention those that are exported under tolling and processing trade, a duty-free policy that alloy makers use for importing scrap and exporting 20,000-30,000 tonnes of alloy ingots per month.

Unwrought aluminium alloy normally is made of scrap in China and the production of the alloy is encouraged by Beijing's policy to use recycled materials.

But this year, Chinese smelters increased exports of alloy, made directly from primary aluminium with the addition of other metals such as magnesium, silicon and manganese, to take advantage of strong international prices in the face of weak domestic demand.

Exports jumped 430 percent from a year earlier to 113,908 tonnes in June. The exports alarmed Beijing as the government is trying to cut exports in order to cool investment in the energy-intensive aluminium industry, Wang Feihong, senior analyst at Antaike, a state-owned research group, said.

"The new tax aims to cut smelters' exports. It does not apply to exports under tolling and processing trade," Wang said.

Wang said smelters would cut alloy output and make more metal after tax on the alloy rose to the same level as primary metal. "Local metal supplies will increase."

A trade manager at a large aluminium smelter said he estimated that more than 50,000 tonnes of primary metal would be added to the domestic market each month as alloy exports fell.

But on the international market, traders said the likely fall in future Chinese exports, combined with deferred and delayed projects in other parts of the world due to high construction and energy costs, could start to make a dent in the 1.13 million-tonne stockpile of the metal in LME warehouses, which stand around their highest in over four years.

PREMIUMS SEEN RISING

Traders said Chinese smelters had been shipping as much alloy they had into bonded warehouses in Chinese ports before the deadline as bonded stocks were considered exports by the customs and did not pay the export tax. Smelters were also trying to cancel booked exports for shipments in September and onwards.

"Some overseas buyers may have to buy back from the LME," a trader for an international trading house said.

In Asia, premiums for spot Chinese alloy as well as good Western primary aluminium are moving up on expected low exports from China, despite high stocks in South Korea, traders said.

A trader in South Korea for a major international trading firm said about 130,000 tonnes of primary aluminium ingots and 150,000 tonnes of Chinese unwrought aluminium alloy ingots were stored in warehouses in South Korea, enough to feed local demand for the rest of this year.

Premiums for spot Chinese unwrought aluminium alloy ingots may rise to $20 per tonne in the fourth quarter from current discounts of $10-$20 to cash LME prices . The discounts were about $40 in late July.

Premiums for spot good Western primary aluminium ingot are expected to rise to about $100 in the October-December quarter from the current $75-$80. The offers were at $60-$75 last month.