The China Price: Up, Up and Away (Part 2)

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Compounding changes to the China import/export tax and VAT rebate schemes in July of 2007, additional changes were announced on December 14 for implementation on January 1. With help from Jason Zhang, our metals expert in China, we review these changes and offer some early insight into the likely effects.

Broadly, there are three different changes that have been made or are taking place that will affect the markets going forward. These changes specifically include: import duties, changes in export duties and changes in the RMB/USD exchange rate.

Import duties on a range of metal raw materials have been reduced based upon what the Chinese government wants to achieve for each material. The duties vary according to the Harmonized Tariff Code. Even among metals categories some items have been minutely adjusted like certain Ferro Alloys from 2% to 1% whereas other materials like primary aluminum was reduced from 5% to zero from Jan 1. Some of the more notable changes are:

  • Aluminum in various unwrought forms, waste and scrap, and in semi finished forms of plate and wire
  • Copper in basic matte form and copper cathodes, unrefined copper, anodes and waste have all been reduced
  • Nickel matte and waste
  • A range of Ferro Alloys, notably FeCr, FeMo and FeTi have all been reduced in varying degrees
  • Basic iron products like pig iron pellets, scrap iron, certain categories of thin steel strips, tube and pipe, and cookware

At first sight these changes appear rather haphazard and arbitrary but the word is that many of these changes have been implemented following bilateral agreements with other countries in Asia and South America or in response to specific WTO requirements. The cumulative effect will be to not only satisfy these obligations but may be as important to boost imports of raw materials and thereby partially redress the trade imbalance as these are predominantly dollar denominated commodities.

On the exports side, tariffs have been adjusted in both directions. Following large reductions in VAT rebates in mid 2007 further increases in export taxes have been made on polluting energy intensive basic industries including iron products from pig iron to steel strip, aluminum and pulp/paper, as well as Ferro Alloys but the export duties for some copper containing products have been reduced. On balance export tariffs have been increased. We see this as largely an attempt to dissuade investment in new capacity aimed solely at exports and an attempt by the authorities to encourage the shut-down of older less economical and environmentally unfriendly facilities.

Links to the tables illustrating the changes are as follows:

New provisional tariffs for import:

For US companies the second to last column is the relevant one, this covers countries with Most Favored Nations status in 2008, such as the USA, the EEC and most of ASEAN

New tariffs for  export:

Again the last column on the right is the new Provisional export duty rates for 2008. The second to last column were the regular export duties prior to the change.

The authorities have stated these are provisional tariffs and may be changed again in the future. There are no surprises as this is the third change in the last year.

The final issue of more importance than any of the above is the relentless drift of the RMB. It is now trading at below 7.30 to the dollar down from over 7.60 in Q2 2007. The word on the street is this will be 6.7 during 2008 a further strengthening of 8-10%. As a buyer of Chinese produced products if you can cover your RMB exposure for 2008 then do it now. It’s likely to have a bigger impact on your costs than any tax changes and is the one variable that can be hedged.

–Stuart Burns

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