In a reverse of its usual pro-export policy, Beijing is making it more expensive for its aluminium manufacturers to export. As from January 1, the government abolished an export tax rebate of 8 per cent for aluminium and imposed a tax of 5 per cent on exports of the product. The decision to add 13 per cent to the cost of aluminium exports aims to slow investment in this overheated sector and cut energy consumption. The world's largest producer and second-largest consumer of aluminium, China has become a key determinant of global prices, in this as in other commodities. In 2003, China accounted for 53 per cent of the net growth in global alumina demand. Rumours of the tax measures pushed up three-month aluminium futures on the London Metal Exchange to US$1,963 by December 29, its highest level for nearly 10 years. The price has since fallen back to about US$1,800, nearly what it was before the export tariffs were reported. But analysts say China will remain the most important determinant of aluminium prices in coming months. China's exports of electrolysed aluminium are projected to fall to about 700,000 tonnes this year from 1.3 million tonnes last year when they accounted for about 20 per cent of global exports. The tax measures are part of Beijing's efforts to stem a surge in production and fixed investment that continued last year despite measures to curb new capacity in selected industries, including aluminium. Last year, China's 130 producers churned out 6.6 million tonnes of aluminium, up from 5.55 million in 2003 and more than double the 2.8 million in 2000. National output this year will rise to 7.2 million tonnes, according to forecasts by Aluminum Corp of China (Chalco), the country's biggest producer. The main consumers are the construction, electrical, food packaging and vehicle industries, all of them growing strongly. The downside is consumption of electricity which accounts for a third of the production cost of aluminium, or 14,000 kilowatt-hours per tonne. Last summer China suffered a power shortfall of 30 million kW and shortages have continued this winter, in the north, east and central regions. Wang Zheng, an analyst at Shanghai Dalu Futures, said that the main reason for the tax changes was to save electricity in light of severe shortages since the second half of last year. 'Some of the factories produce just for export, and domestic supply of aluminium already exceeds demand,' he said. 'In addition, the central government cannot control the increase in new capacity, because local governments give the go-ahead. You cannot demolish an existing plant, so the best way is to use market mechanism that will bring down the price and discourage investment.' The measures have hit domestic prices, with April futures closing at 15,960 yuan a tonne on Friday on the Shanghai Futures Exchange, down from last year's peak of 19,960 yuan. The changes will put further pressure on the dozens of domestic aluminium processors which depend on exports for survival. As of September last year, about 50 of the 130 producers were in the red, 90 per cent of them small and medium-size firms. Worst hit will be those that use exclusively imported material and earned their profit from the tax rebate. The greatest beneficiary of the tax measures will be Chalco, which accounts for about 20 per cent of aluminium capacity and has a dominant position in production of alumina, of which two tonnes are needed to make one tonne of aluminium. This year, it plans to produce 7.2 million tonnes of alumina, of which it will sell 4.2 million to other producers and consume the rest itself. Its near monopoly position gives it a cost advantage over all other producers and enables it to bear lower prices more easily. For Chalco, the best outcome of the tax changes would be the closure of many of these small and medium-size companies which are unable to operate profitably in the new conditions.