Chinese aluminium prices to fall in 2007 on export tax increase

China's aluminium prices are expected to firm further in the short term on the back of the recent revision in customs tax policies, but average prices in 2007 are expected to be lower as domestic supply increases, industry sources said this week.

"The export tax on ingot went up to 15% and that added cost will be reflected in prices soon. The whole industry is talking about it now and most plan to transfer the costs to consumers," an official from major trader China Minmetals said. "So far this week, prices are steady...it will take some time for the impact to be more obvious...we expect prices will rise 5-10% in the short term," he added.

A Beijing-based trader agreed: "There is bound to be an impact, it's a big change. But it will take time for the market to digest and react...prices going up 5-10% in the short term is very likely."

China on October 27 announced that it had revised the export tax on aluminium ingot to 15% from a previous 5%.

"Ingot prices will rise on the tax change, but with alumina costs down, ingot prices should stay around Yuan 20,000/mt ($2,540) next year," another Chinese trader said.

An analyst from Beijing Antaike, the state nonferrous metals information division, however, was less optimistic.

"The market initially reacted with prices falling after the news broke last Friday. But London Metal Exchange prices remained firm so that helped to support domestic prices," he said. "We expect Shanghai prices should be steady in the short term as long as LME is firm...local prices may even edge up slightly but in the long run prices will be lower," he added.

The analyst said the sharp rise in export tax will mean reduced exports, bringing more supply to the domestic market that would put pressure on local prices.

"That will be the main factor pressuring prices down. The only way out is if we can see an increase in aluminium semis production and semis export...that can then help to digest the increased domestic ingot supply and also buffer and balance the reduced ingot exports," the Antaike analyst said.

"Domestic prices will average around Yuan 20,000/mt this year, but for next year, we are likely to see average prices down to below Yuan 18,000/mt on an oversupply of ingots in the local market," he added.

The analyst said the higher export tax would also affect the arbitrage price between China and LME levels, which would further reduce the motivation to export.

"But fortunately, alumina prices have dropped very sharply this year and are expected to fall further next year, so smelter profits will not be much affected even if ingot prices fall," the analyst said.

An official from producer Fushun Aluminium agreed: "Lower production costs will help smelters buffer the lower ingot prices...and alumina costs are expected to edge down further next year."

According to Antaike's earlier forecasts, China is expected to export just about 1 million mt of primary aluminium in 2006, down from the actual 1.14 million mt exported in 2005. Aluminium semis export is also expected to reach at least 1 million mt, which is up 41% from the 710,000 mt exported in 2005.

"We are maintaining our earlier forecasts for this year as the announcement came too sudden and no one is sure what to expect next. There are only a couple of months left to the year and contracts are all signed and sealed for this year, so there is little change expected," the Antaike analyst said. "For 2007, however, we are likely to see lower projected exports," he added.