Aluminium firms lose tax benefits
New policy aims to tackle over-investment in heavy industry and shortages in power and natural resources, writes Eric Ng
China has scrapped tax benefits to companies that import alumina and export aluminium, the latest in a series of measures to tackle over-investment in heavy industry and stubborn shortages in power and natural resources.
Industry policy planner National Development and Reform Commission (NDRC) said in a statement on Monday that no new tax-free 'tolling' contracts would be allowed from August 22. Existing contracts would not be affected.
Tolling - the import and processing of alumina specifically for the manufacture and export of aluminium - is now exempted from an 8 per cent import duty and 17 per cent value-added tax.
The exemption was aimed at encouraging exports and creating employment.
By scrapping the incentives, the government hopes to raise the production costs of alumina processors that rely on foreign resources and cut exports in the energy-intensive aluminium smelting industry.
Exporting aluminium implies the export of energy, as electricity accounts for more than a third of the total cost of turning alumina into aluminium.
Of the 1.4 million tonnes of aluminium ingots exported by China last year, more than 80 per cent benefited from tolling incentives, according to Wang Feihong, a market analyst at state-backed industry consultancy Beijing Antaike Information Development.
The tolling business consumed 26 per cent of the 5.87 million tonnes of alumina imported by China last year. The mainland imported 45 per cent of its alumina demand.
The aluminium smelting industry is one of the main contributors to the nation's power shortage, which is expected to reach as much as 3,500 megawatts - or 8 per cent of national generating capacity - this year.
The government cancelled an 8 per cent value-added tax rebate and imposed a 5 per cent tax on exports, tightened credit to new aluminium-related projects and raised power tariffs for smelters.
Aluminium export growth has already slowed to about 22 per cent in the first half of this year from more than 50 per cent last year, Mr Wang said.
Aluminium production, which grew at an average of 25 per cent between 2001 and last year, was expected to slow to 11.8 per cent this year, according to BNP Paribas Peregrine.
But analysts expected more short-term pain for the industry in which 80 per cent of smelters suffered losses this year, according to the NDRC.
'In the short term there may not be a big impact ... but the over-supply problem will worsen early next year after the outstanding tolling contracts expire, as more aluminium will be transferred from the export market to the domestic market,' Mr Wang said.
Although this may depress domestic aluminium prices, international prices will be buoyed by reduced exports from China and the possible closure of one million tonnes of annual capacity in Europe next year due to higher electricity prices, he added.
With about 150 smelters, China's aluminium industry is ripe for consolidation, although progress has been slow.
Aluminum Corp of China (Chalco), the country's largest alumina and aluminium producer, wants to raise its smelting capacity to 1.33 million tonnes by the end of this year from 830,000 tonnes last year, mostly through acquisitions.
Oversupply tends to take a long time to wane in China's largely state-dominated heavy industrial sectors.
'China is different from the west,' Mr Wang said. 'Loss-making does not necessarily mean a company will stop production here.'
State-owned firms tend to be slow to close plants due to unemployment concerns.