China's plan to cut the rate of value-added tax on nonferrous metals is expected to widen the price gap between near- and long-term futures contracts traded on the Shanghai Futures Exchange, Chinese industry sources said this week.
They said "long run" futures contract prices -- for example, those due to settle in early 2020 -- could be lower once the VAT cut is factored into production costs. This would be the case especially for copper, nickel, lead and zinc traded on the SHFE. Near-term contracts are those due in coming months.
During the National People's Congress this week, China announced it would cut the VAT rate for nonferrous metals to 13% from 16% currently.
Following the VAT cut news, the SHFE's most active 1905 (May 2019) copper futures contracts price on Wednesday fell Yuan 150/mt to Yuan 49,400/mt ($7,362/mt).
The most active 1905 aluminum futures contract dipped Yuan 75/mt on Wednesday to Yuan 13,505/mt ($2,013/mt) from Tuesday, SHFE data showed.
On Wednesday, the price gap for 1904 (April 2019) and 1905 (May 2019) copper and aluminum futures contract were both at Yuan 440/mt.
Shanghai-based Chinese brokerage Donghai Futures said Wednesday that the VAT cut would trigger higher spot and near-term futures contract prices, but could push down long-run contract prices.
The brokerage said the VAT cut, which most market players see taking effect around May or June, would favor producers' profits.
Metals stock holders could slow down sales to benefit from the lower VAT, which could result in near-term demand outstripping supply.
The tax change may also impact term export contracts of downstream aluminum products basis SHFE, and some high and low carbon ferrochrome contracts that use domestic Chinese prices as their base, sources said. However, such term contracts are rare as London Metal Exchange prices are used universally, they said.
Chinese analysts predicted the VAT cut would favor the Chinese nonferrous metals sector's raw materials consumption, stimulating metals demand and encouraging exports.
Beijing-based Galaxy Futures said in its weekly report that the nonferrous metals sector was an upstream industry that would benefit from the VAT cut in terms of profits.
It noted that at present, Chinese aluminum profits were thin but the proposed VAT rate cut could help enlarge profit margins in the future.
Aluminum production costs in China have risen on limited bauxite supply and rising costs of inputs like carbon anode, according to Beijing Antaike.
Chinese analysts said assuming factors such as exchange rates, economic conditions, import duty rates and other miscellaneous costs did not change too much, the VAT cut could create better arbitrage trade opportunities between the SHFE and LME, on lower imported materials costs.
This would favor Chinese metals exporters, who would benefit from lower production costs to be competitive in export markets.
Other market sources said more details around the tax cut plan, such as the roll-out date, needed to be announced, but a 1%-3% cuts in domestic taxes may not have much impact.- Platts -