The Impact of Value Added Tax Reduction of 3% on Aluminum Industry

             Value-added tax belongs to turnover tax. Reducing the tax rate can significantly improve the cash flow of enterprises with higher gross interest rate, but it has little effect on enterprises with lower gross interest rate or loss. According to the statistics of China Nonferrous Metals Industry Association, the sales profit margin of China's aluminium smelting industry in 2018 is only 1.98%, and the industry's profitability is still poor. In this context, assuming that the gross aluminium interest rate of a certain enterprise is 100 yuan per ton, the value-added tax will be reduced by 3 percentage points from 16%, which means that the value-added tax paid by the enterprise will only be reduced from 16 yuan per ton to 13 yuan per ton, with little impact on the absolute price of the enterprise itself or the market.

  From the point of view of cost structure, the weighted average total cost of China's electrolytic aluminium in 2018 is about 14900 yuan/ton (including tax). Among them, labor cost, depreciation cost, maintenance cost, financial cost, management cost and sales cost totals about 2250 yuan/ton, accounting for 15% of the total cost. Considering that the above part does not produce VAT, the reduction of VAT rate by 3% has no fundamental impact on this part of the cost. At the same time, considering that the remaining 85% of the cost and expenses are raw materials such as electricity, alumina, anode carbon, aluminium fluoride, etc. purchased by enterprises, in the monthly conversion cycle of VAT tax rate from 16% to 13%, to a certain extent, the input tax will exceed the sales tax, so the cash flow and profitability of aluminium enterprises will be significantly improved. In the long run, because aluminium is a fully competitive industry, in theory, in order to gain a larger market share, enterprises are willing to transfer this part of the benefits to customers or consumers, so they will choose to sell products at a lower price, which is not conducive to the price.

At present, the market sentiment still concentrates on the time when VAT is lowered. During this period, the futures market will experience short-term and long-term price structural changes. The spot aluminium market will show a high level at the end of the month, while the spot market will also show the willingness to hoard and sell. But as long as the time of VAT reduction is clear, the focus of market attention will quickly return to the basic supply and demand of electrolytic aluminium, and Futures and spot prices will gradually return to a reasonable level.

From April to May 2018, the government announced that VAT would be reduced from 17% to 16%. From the reaction of futures and spot markets at that time, the trend of aluminium price was not greatly affected by this policy, except for the short-term structural change of aluminium near-term and far-term. The core factor leading the price direction was still the supply and demand fundamentals.

Based on the above analysis, the government's reduction of VAT rate by 3 percentage points will only have a positive impact on the near-term and long-term structure of futures aluminium and the traders who accumulated considerable inventory in the early stage, and will have a relatively limited improvement on the absolute price trend and the enterprises with lower gross interest rate.