China hikes VAT on metals ores, could hit imports

China's cabinet has approved a hike in the value-added tax on metal ores to 17 percent from 13 percent starting on Jan. 1, a move that could further hurt cash-strapped metals firms.

The change, announced in a report posted on the Ministry of Finance website (www.mof.gov.cn) on Tuesday, will hit small firms already struggling with reduced cash flows because of the global financial crisis.

The ministry did not release details of the VAT reform, but analysts, traders and smelters said they expect the hike to apply to both locally produced ores and to imports.

China is the world's top consumer of copper and aluminium, and the biggest producer of aluminium, lead, zinc and steel. But its production of refined metals relies heavily on imported ores.

"The hike would increase demand for cash, while small- and medium-sized smelters' cash flows have fallen," a Beijing-based metal analyst said.

A trader said the hike would increase cash demand for smelters by 30 percent, even though the smelters could pass on the cost increase to their finished products.

A zinc smelter's cash payment would rise by about 420,000 yuan to nearly 1.8 million yuan when declaring customs for a shipment of 5,000 tonnes of zinc concentrate, based on metal price at $1,150 a tonne, the trader estimated.

"Imports of lead and zinc concentrates may fall in the first quarter of next year," said a manager at the international trade department at Zhuzhou Smelter, the top zinc producer in China.

He added reduced cash flows and low metal prices were already forcing Chinese lead and zinc smelters to cut production, with more reductions likely in coming weeks. The lead and zinc industries are dominated by small smelters in China.

Copper concentrate imports, which are dominated by large smelters, however, may not fall on the hike.

"Imports would follow the market. There were a lot of imports even when the copper prices were over $8,000 a tonne," a senior executive at Yantai Penghui Copper said.

A manager at the trade department of Tongling Nonferrous, China's second-biggest copper firm after Jiangxi Copper, said he believed the VAT hike would not cut imports of copper concentrate but weaker domestic demand might trigger smelters to slow production.

China Smelters Purchase Team, which groups major smelters that account for about 80 percent of China's imports of concentrate, is considering joint production cuts, the manager said, without giving details.

Imports of nickel concentrate and iron ores may remain soft in coming months, even without the hike, as China holds large stocks of the materials, traders said.

Falling nickel prices have forced producers of nickel and ferro-nickel to cut production, building nearly 10 million tonnes of nickel concentrate at Chinese ports, Jinchuan Group, the country's top nickel producer, said on a statement released on its website on Oct 24. (www.jnmc.com)

The stocks are equivalent to the country's total imports in the first eight months of this year.

Low steel prices and weaker domestic demand have also triggered Chinese mills to cut production. About 74 million tonnes of imported iron ores, about 2 months worth of imports for the country, are stored at warehouses in Chinese ports.

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