In a bid to support domestic smelters, China is widely expected to introduce a 5% import tax from March 1 for primary aluminum according to the China Daily. Even with a domestic price at $1775/metric ton on the SHFE many Chinese producers are losing money, because of their reliance on higher cost mix of imported coal and bauxite. With 34% of the world’s production capacity but only 15% of the world’s bauxite production, China is heavily reliant on imports of raw materials and exports of refined metal. The problem is with the domestic SHFE price which is currently above the world price. Domestic consumers are more inclined to buy from traders importing ingot than from domestic suppliers.
The State Reserve Bureau SRB has been trying to support the domestic producers by buying up stock sitting at the mills, 290,000 tons from eight smelters in December and 300,000-500,000 tons per month proposed for March and May. This has just prompted traders to import more metal as the arbitrage between the LME and SHFE has widened, encouraging 40,000 tons to be booked for February/March arrival. Hence the import duty to discourage imports. Smelters such as Chinalco had been pushing for a 10% import tax but the government will likely re-instate the 5% tax they rescinded two years ago.
As China’s domestic semi’s producers see the primary price rise still further above world levels and hence impact exports even more, watch the government’s next move, to raise export tax rebates on semis. These two moves combined could have the effect of further depressing the aluminum price. May be it is no surprise the LME has already drifted back below $1400/ton ($0.63/lb) in recent days.