China Considers an Import Duty on Primary Aluminum

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Talk of China imposing an import tax on primary aluminum has had the market in a stir trying to predict the likely impact if it went ahead. Rising imports this year have led to a lot of pressure on domestic producers, a spokesman for the National Development and Reform Commission (NDRC) is quoted as saying in Bloomberg. Chinese imports have been 13 times higher this year than in 2008 as traders and manufacturers imported metal as domestic prices surged above world levels. Imports jumped to 1.4m tons in the first ten months but as the SHFE premium over the LME has dropped back, last week it was at $2277 per ton against the LME $2012 per ton, so have volumes.

Chinese domestic production is estimated by the NDRC at 12.6m tons and consumption at something over 12m tons, so broadly it is in balance. Regional governments have been supporting their local champions in an effort to minimize unemployment in their regions and this has encouraged more production to come back on stream. In addition, central government has allowed producers to buy electricity direct from generators reducing their costs, effectively supporting the aluminum industry. Now power costs have increased as the government has raised prices. Metals producers consume a fifth of China’s power production and all metal producers will be effected by the increase in power costs – although aluminum more than most because of the high percentage of electricity that makes  up the overall cost of production.

If import duties are imposed, domestic aluminum prices will rise further and encourage more production capacity to come back on stream. It is rumored China has up to 18 million tons of capacity so there is immense scope for more metal to be produced. Excess metal could find its way onto export markets. So the combination of reduced China buying and possible increased Chinese exports later next year is generally seen as depressing for price prospects in 2010 if the import tariff is introduced.

–Stuart Burns

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