China to cut manufacturing VAT by 3 percentage points

SHANGHAI, Mar 5 (SMM) – China will cut the value-added tax (VAT) for the manufacturing sector by 3 percentage points, Premier Li Keqiang said in the government work report at the annual National People's Congress on Tuesday March 5.

This will lower VAT from 16% to 13%. The VAT for transport and construction will also be cut from 10% to 9%.

Impact of the tax cut on nonferrous metals:

Copper: The backwardation structure on the Shanghai Futures Exchange copper April-May spread widened, to about 600 yuan/mt as of CST 10:11 on Tuesday March 5, compared to 70 yuan/mt at closing on March 4. A tax cut will lower costs for holding forward cargoes. This generated arbitrage opportunities and widened the backwardation structure.

Aluminium: The VAT cut is estimated to widen the price spread between SHFE April and May to 355.6 yuan/mt, SMM calculations showed. The SHFE 1904 contract traded at 13,750 yuan/mt as of CST 10:15 March 5. This equated to 11,853 yuan/mt after excluding tax [13,750/(1+0.16)=11,853].

Excluding tax, the price would increase by 355.6 yuan/mt after the VAT cut.

Excluding position-holding costs, the price spread between April and May contracts will be 355.6 yuan/mt if the tax cut takes effect from May 1. This compared to 190 yuan/mt as of CST 10:26 on March 5.

Zinc: The backwardation of SHFE zinc April, May contracts widened as investors expected a lower VAT rate to reduce costs in back month contracts. On the morning of March 5, the most-active SHFE zinc April contract traded some 450 yuan/mt higher than the SHFE May contract. This compared with a price spread of 370 yuan/mt at closing on March 4.

The market expected the lower tax rates to take effect in May, SMM learned. 

Nickel: As of CST 11:20, Tuesday March 5, the SHFE nickel March contract traded some 1,290 yuan/mt higher than the May contract, compared with a price spread of 260 yuan/mt at closing on Monday March 4.

SMM assessed that the VAT cut will lower spot prices of SMM #1 nickel to 102,771 yuan/mt, down some 2,730 yuan/mt from the average spot price on the morning of March 5.

Lead: As of CST 10:53 on March 5, the price spread between the most-liquid SHFE lead April contract and the June contract registered 275 yuan/mt. SMM assessed that a 3-percentage-point cut in VAT will lower spot prices of SMM #1 lead to 17,072 yuan/mt, down from the 17,525 yuan/mt on the morning of March 5.

Tin: Sellers held back and some smelters suspended offers after the announcement of VAT cut. Discounts of spot tin against futures prices narrowed, and premiums of Yunnan Tin brand increased to 300 yuan/mt before noon on March 5.

Excluding costs of holding cargoes, SMM assessed that the tax cut will bring about a profit of 3,840 yuan/mt, based on the average price of SMM #1 tin on the morning of March 5.

New energy: For downstream battery producers and original equipment manufacturers, the tax cuts are expected to offset part of the pressure from lower subsidies on new energy vehicles, and improve companies' cash flow.

The lower taxes will also raise the gross profit and boost technological innovation of downstream producers, SMM expects.