What impact does the tax rate reduction have on the non-ferrous industry and aluminum industry chain?

On March 5th, the Premier stated in his government work report at the Two Sessions that the reform of value-added tax will be deepened. This year, the current tax rate of 16% in industries such as manufacturing will be reduced to 13%, and the current tax rate of 10% in industries such as transportation and construction will be reduced to 9%; Ensure that the tax burden of all industries is only reduced and not increased.
Starting from April 1st, China's value-added tax rate reduction policy will be officially implemented, and the value-added tax rate for the manufacturing industry will be reduced from 16% to 13%. The introduction of the new tax reduction policy has immediately sparked discussions in related industries. The "big gift package" for tax reduction and fee reduction at this year's two sessions is another tax reduction and fee reduction after last year's policy. The reduction of value-added tax rate this time will have an impact on the profitability of the non-ferrous industry, and domestic metal product mining enterprises and new material enterprises may benefit from it.

Smelting and processing industry
Adopting a fixed amount or fixed proportion pricing model for smelting or processing fees has no impact on the profitability of the enterprise. The pricing model for smelting and processing enterprises often adopts a fixed amount or fixed proportion smelting or processing fee model, excluding the impact of inventory price fluctuations on profits. The profit or profit margin of the enterprise's ton processing is relatively fixed, so the reduction of value-added tax rate has no impact on the profitability of smelting and processing enterprises.

Mining enterprises
For metals priced domestically: The pricing of mineral products is based on quotes from domestic information websites, with enterprise price negotiations being the main factor. As most of the metals priced domestically are scarce resources unique to China, mining enterprises have relatively strong bargaining power. Therefore, if the value-added tax rate is reduced by 3 percentage points, the sales revenue of enterprises will increase by 2.65% (1.16/1.13-1); Assuming that the purchase price including value-added tax remains unchanged and the cost of obtaining value-added tax special invoices accounts for about 20% of operating costs (mining companies often have less deductible value-added tax on the cost side), the cost side will increase by 0.53%, and the overall gross profit of the enterprise will be significantly improved.

For metals priced internationally: the reduction in domestic value-added tax rates has no impact on the selling prices recorded by mining companies as operating income; The deductible value-added tax on the cost side of simultaneous procurement is relatively small. If the purchase price including value-added tax decreases correspondingly due to the reduction of value-added tax rate, the cost side of the enterprise will not change. Therefore, the reduction of value-added tax rate has little impact on the profitability of metal variety enterprises with international pricing.

New material enterprises
The product has high added value and strong bargaining power, and new material enterprises may benefit significantly. For new material enterprises, their technological content is high, and they have strong bargaining power in the upstream and downstream industry chain. The selling price of their products, including value-added tax, can be maintained unchanged. Therefore, the reduction of value-added tax rate is conducive to the improvement of their income end; At the same time, its main cost side raw material cost is mostly non-ferrous metal standard products, and the purchase price is determined based on the exchange price. The reduction of value-added tax rate has no impact on its raw material cost. Therefore, new material companies may benefit significantly.

Specifically in the aluminum industry chain, the impact of the reduction in value-added tax on the operating profits (costs) of different links in the aluminum industry is as follows:
Upstream ore mining and selection
The gross profit margin of upstream ore mining and selection is relatively high, and the cost excluding tax is equivalent to the tax included part. The tax included part includes energy, mineral processing materials, transportation services, etc., while others are mostly non tax included parts such as labor, resource tax, depreciation, etc. Due to the need for formal VAT special invoices to be issued for VAT deduction, considering that the mining industry cannot deduct a lot and has high profits, the reduction of VAT has limited impact on the profit improvement of the mining industry.
Middle and downstream alumina, electrolytic aluminum, aluminum processing

The proportion of tax included costs in the midstream sector is relatively high, basically reaching over 80%, and there are many deductible inputs such as raw materials. Therefore, the reduction of value-added tax has a significant impact on the increase of enterprise profits. The main cost of downstream processing industry is also raw materials, especially for mid to low end processing products, which can cost over 90%. Lowering value-added tax also has a significant impact on the profit of the processing industry. In addition, due to the lower gross profit of the middle and lower reaches, tax reduction has a greater elasticity in increasing corporate profits.
Aluminum import and export
Due to the reduction of value-added tax on aluminum imports, the price including tax has decreased, which is beneficial for imports. However, there is not much competition between imported aluminum and domestic aluminum, and the reduction of value-added tax can reduce the cost of imported aluminum. The scale of aluminum imports is relatively small, and the impact on domestic aluminum supply and demand is not significant, possibly concentrated in certain special aluminum materials.

However, the reduction of value-added tax has a significant impact on the import of scrap aluminum. On the one hand, some domestic scrap aluminum does not include tax, and the reduction of value-added tax has lowered the tax differential, which is beneficial for reducing enterprise costs. On the other hand, the decrease in the cost of imported scrap aluminum is beneficial for increasing imports.
In terms of exports, considering that the current export tax rebate rate for aluminum sheet and strip is 13% and 16% for aluminum foil, the original 16% tax rate will inevitably be lowered to 13% after the reduction of value-added tax. Whether the 13% portion will be adjusted remains to be seen. Looking back at last year's situation, due to only one point of tax reduction, the value-added tax is still generally higher than the export tax rebate for goods. However, in this round of tax reduction, most export tax rebates are equal to or even lower than the value-added tax. Therefore, we believe that export tax rebates will be synchronized with the reduction of value-added tax. If the 13% export tax rebate for aluminum strips remains unchanged, our export comparative advantage will be improved, and the export space for low-end aluminum materials will expand, which is conducive to the expansion of export demand. Considering that the tax rebate rate for some exported products was still increased after the tax reduction last year, we believe that if the rebate rate is adjusted, the export rebate rate for aluminum sheet and strip is likely to be higher than 10%, that is, the rebate tax difference will be less than the current 3%, which is beneficial for the export of aluminum sheet and strip.

Impact on product prices

In terms of ore prices, although the domestic ore market is a seller's market, ore prices are mainly quoted without tax. Therefore, the value-added tax will be reduced, and the price of ore with tax will be reduced proportionally. That is, the price of ore with an aluminum silicon ratio of 5.0 in Shanxi will be 500 yuan/ton without tax to the factory, and the cost price with tax will be reduced from 625 yuan/ton to 610 yuan/ton, a year-on-year decrease of 15 yuan/ton. This is equivalent to a cost reduction of 33-37.5 yuan/ton per ton of alumina, easing the cost pressure on alumina plants.
In terms of imported ore, the quotation for imported ore is mainly based on FOB, excluding tax, which is similar to domestic ore. The reduction of value-added tax will lower the cost of imported ore in Shandong and other regions, and the cost reduction is basically similar to that of domestic ore.
In terms of alumina prices, alumina quotations are based on spot transactions, and the prices quoted on the three networks are all inclusive of tax. Looking back at the three network quotations in May last year, there was no significant decrease in prices due to the reduction of value-added tax. Based on this, it can be observed that the impact of the reduction in value-added tax on alumina prices depends on the market conditions at the time point. However, the alumina market has been in a seller's market for a long time, and the long-term price of electrolytic aluminum plants will still follow the three network quotation. The impact of the value-added tax reduction on spot purchase prices depends on market competition, and the current market is in a downward stage. Traders have a strong wait-and-see attitude, and the arbitrage space for funds is small. It is difficult for alumina prices to immediately push down due to the tax reduction. However, after long-term market competition, the price will reflect the benefits of the value-added tax reduction.
The imported alumina market is mainly dominated by traders. Considering the discontinuous trading characteristics of the domestic alumina market, if the prices of alumina inside and outside remain basically the same at the time of tax reduction, it will trigger arbitrage among import traders and reduce the price of imported alumina. However, currently the FOB price in Australia is still as high as $390/ton (equivalent to at least 2950 yuan/ton including 13% tax), which is much higher than that in China. Tax reduction can increase the price advantage of imported alumina, but this comparative advantage will soon disappear over time. Considering the current large price difference between domestic and foreign markets, the import of alumina after tax reduction has little impact on the domestic alumina supply and demand, at least not on the metallurgical grade alumina market.

The export alumina market, due to the low import price ratio, has a more suitable export price ratio. Based on the offshore alumina price of 396 US dollars/ton in Australia today, at an exchange rate of 6.72, it is equivalent to about 2660 yuan/ton in Chinese yuan. However, there is no export tax rebate for alumina. Currently, even if the tax is reduced to 13%, according to the average price of 2750 yuan/ton in Shandong and Guangxi regions, the theoretical price after tax reduction will be 2687 yuan/ton. The price after tax reduction is basically close to the offshore price in Australia. If domestic alumina continues to decline and overseas alumina prices rise, it may open an export window.
The price of electrolytic aluminum is also quoted including tax, similar to alumina, but aluminum ingot trading is active and there is cross period arbitrage in the futures market. After the tax reduction time is confirmed, the forward aluminum ingot price will be immediately lowered, and the magnitude of the reduction will refer to the change in cross period price difference. At present, there is an oversupply of electrolytic aluminum and the price is relatively low. The reduction of taxes is relatively negative for aluminum prices, and the reduction of taxes may greatly benefit downstream industries.
The energy cost of the aluminum industry mainly includes coal (self owned electricity), grid electricity, natural gas, and coal gas, divided by industry.

The energy costs of the alumina industry mainly come from natural gas, coal gas, and coal. The vast majority of alumina plants have self generated electricity and purchase relatively small amounts of grid electricity. The price of natural gas is guided by the government, and price reductions are generally not implemented until several months after the policy is implemented. Considering the strong support atmosphere of the government for the manufacturing industry, it is expected that the tax reduction will release the majority of the tax reduction to enterprises, that is, the 10% inclusive price will be reduced to the 9% inclusive price.
The second is the cost of self owned electricity coal, which generally accounts for 60-70% of the power generation cost. Another part is equipment depreciation, which is basically non deductible. Due to the fact that the coal market is still in a seller's market, and the coal to plant price generally includes the pithead price and freight, freight usually accounts for a relatively high proportion, some even exceeding half, while transportation services only drop from 10% to 9%. Therefore, there is not much room for the coal to plant price to decrease, and there is not as much room for self owned power plants to enjoy the benefits of tax reduction.
Relatively speaking, it may be even less advantageous for grid power companies to enjoy tax reduction benefits. The on grid electricity price and power purchase are both policy electricity, involving power generation enterprises, power grids, and users, and the user end is often weak. It is difficult to force the electricity price to be lowered due to the reduction of value-added tax. Moreover, due to the high cost of coal, without policy promotion, the direct purchase of electricity price reduction may result in the next round of power purchase agreements.
Overall observation shows that the reduction of value-added tax has resulted in a higher improvement in operating profits for alumina plants than for electrolytic aluminum plants. This is mainly due to the fact that the procurement of alumina plant ores is quoted without tax, while other raw materials have relatively strong bargaining power in the industry chain; Compared to electrolytic aluminum plants, the electricity cost of grid power enterprises depends on electricity price reform and is not closely related to the reduction of value-added tax. The benefits of self owned electricity are relatively high; And its alumina price must go through a long period of market competition. For coal and ore mining and selection, their profit margins are relatively high, and the elasticity of the benefits of reducing value-added tax is not significant; In addition, for the transportation of the aluminum industry, long-distance railway transportation is mainly used, and the reduction of freight rates depends on the Ministry of Railways; The cost reduction of road transportation will be more significant. In terms of aluminum processing, the reduction of value-added tax will significantly lower the operating costs of enterprises.
(Source: Aluminum Mesh)