China will scrap a preferential tax policy on alumina imports and aluminium exports from today, according to a senior official with the National Development and Reform Commission (NDRC).

"The move aims to further restrict the alumina processing trade and ultimately reduce exports of highly energy-dependent aluminium products," Hou Shiguo, deputy director of the industrial policy department under the NDRC, told China Daily yesterday.

Before the policy change, most aluminium producers in China enjoyed a full rebate of the 17 per cent value-added tax on aluminium exports and of the 8 per cent tax on alumina imports. After the preferential policy removal, industry experts say, aluminium producers in China will be forced to cut exports and sell products on the domestic market. It will in the long run exacerbate the oversupply in the market and may lead to price reductions of aluminium products.

Zhou Ming, an industry analyst with Shanghai-based China Securities, said the tax policy change was expected by industry insiders to take effect as early as in May, but sluggish business for the country's aluminium producers had pressured the government to delay the policy release until today.

"It has been expected by domestic producers," Zhou said, adding the move is also in line with the country's efforts to cool down the overheated investment in some high energy-guzzling sectors, such as aluminium and coke production.

Electricity, which has been in short supply in the world's fastest-growing major economy, makes up some 40 per cent of the total cost of aluminium production.

The NDRC's Hou said the country's recent regulations to rein in the investment in aluminium production have taken effect.

At the beginning of this year, China removed an 8 per cent tax rebate and resumed a 5 per cent tariff on exports of aluminium, as well as for copper and nickel.

The nation cut the aluminium export tax rebate to 8 per cent from 15 per cent at the beginning of last year.

Together with other measures adopted by the country, such as increasing electricity prices, lifting industry entrance qualifications as well as restricting bank loans to new investments, this has led to the nation's aluminium production facing difficulties.

Today's scrapping of the preferential tax policy will worsen the situation of China's aluminium producers by intensifying competition among the country's fragmented aluminium sector, said Zhou from China Securities.

He said in order to avoid big shake-ups in the domestic aluminium market following the launch of the policy removal, the country has also taken some supplementary measures.

"For example, the country recently authorized 12 new companies to import alumina, adding to the original eight firms, in a move to stabilize the raw material supply for aluminium production. Almost half of China's alumina supply comes from imports," Zhou yesterday said.

(China Daily July 20, 2005)