The central government's decision to scrap the tax rebate for exports of energy-intensive aluminium will have a big impact on domestic industry, experts said.

Niu Li, a senior economist with the State Information Center, said cancellation of the tax rebate would translate into a direct reduction in export companies' profits.

"This will discourage exports, which will in turn have an impact on domestic smelters," he said.

The Ministry of Finance announced on Tuesday that it would cancel rebates for exports of aluminium and ferro-alloys from January 1 next year.

Before that, companies can receive an 8 percent rebate of the value-added tax on exports of aluminium and 8 to 13 percent on ferro-alloys.

The government wants to reduce exports of aluminium and other metals, because domestic demand is already very large, Niu said.

The increased capacity from the strong demand has lead to a strain on energy and resources, he said.

The government also needs to protect its natural resources, he said.

China's existing alumina reserves, which stand at about 506 million tons, may be unable to meet demand in coming decades.

But an official with the China Nonferrous Metal Industry Association claimed that removal of the tax rebate was a further blow to the industry and exports, because the government already announced it would impose a 5 percent tax on exports of aluminium from January 1.

Domestic producers and exporters would be put under "relatively big" pressure next year, the official said.

It would also fuel price rises on the international market, he said.

Aluminium futures jumped to their highest level in nine and a half years yesterday as the market braced for a shortage of Chinese metal next month.

Zhang Fang, an analyst with Beijing-based China Securities, said scrapping the rebate would increase the cost of exports, which stands at about US$1,500 per ton.

"The cost of exports is expected to increase by about US$120 per ton from January 1," she said. The international price for aluminum is now about US$1,600 per ton.

"Exporters will gradually turn their eyes to the domestic market," she said.

However, domestic demand will slow down, due to the central government's macro control measures to cool investment.

"This will add pressure to the industry, which is already suffering from overcapacity," she said.

China's aluminium production has grown at an average annual rate of 20 percent or 1 million tons each year since 2002.

Aluminium production reached 6.2 million tons during the first 11 months of this year, an increase of 22 percent from the same period of last year.

"Domestic smelters will be forced to reduce production," she said. "The country's aluminium production is likely to increase by only 9 percent next year."

But Liu Qiang, an official with the Aluminium Corporation of China Limited, the nation's biggest aluminium and alumina producer, said the end of the tax rebate would not have an impact on her company's expansion plans for the future.

The company said earlier it would increase its alumina and aluminium production capacity by 50 percent and 130 percent respectively by 2006.

The company's net profits stood at 3.55 billion yuan (US$427.7 million) in 2003, rising from 1.4 billion yuan (US$168 million) in 2002.

During the first half of this year, the company earned a net profit of 3.4 billion yuan (US$409 million).

(China Daily December 30, 2004)