CITIC SEC: Export tax rebate cancellation, copper and aluminum processing industry usher in a new development stage.

CITIC SEC reports that the Ministry of Finance and the State Administration of Taxation have announced the cancellation of export tax refunds for aluminum and copper materials. This cancellation affects 94% of aluminum exports and 50% of copper exports in China, with a wide coverage. CITIC SEC believes that in the short term, the domestic aluminum and copper supply-demand situation and price pressure are inevitable. As overseas dependence on Chinese aluminum and copper is high, the trend of rising overseas prices and processing fees will significantly benefit overseas enterprises. In the long term, the convergence of domestic and international prices is expected to support the improvement of China's aluminum and copper landscape, while the clearing of processing capacity is expected to greatly benefit China's leading aluminum and copper processing companies. Main points of CITIC SEC: Event: On November 15, 2024, the Ministry of Finance and the State Administration of Taxation issued an announcement adjusting the export tax rebate policy. Aluminum, copper, and chemically modified animal or plant oils, fats, and similar products are no longer eligible for export tax refunds. The announcement will take effect on December 1, 2024. Prior to this, most aluminum and copper products in China enjoyed a 13% export tax rebate policy. According to Wind, on the day of the announcement, LME copper prices fell by 0.6% while aluminum prices increased by 5.3%, and SHFE copper prices rose by 0.9% and aluminum prices by 1.1%. This cancellation of tax refunds almost covers major aluminum products and many copper products. The cancellation of export tax refunds this time covers 24 aluminum codes and 34 copper codes, almost including major aluminum profiles, aluminum plates, aluminum rods, and other aluminum products, as well as many copper products. According to SMM, the total export volume of aluminum products covered in this announcement from January to September 2024 reached 4.62 million tons, accounting for 94% of the total exports of unprocessed aluminum and aluminum materials in China. According to Mysteel, the total export volume of the 34 categories of copper products reached 520,000 tons from January to September 2024, accounting for 50% of the total exports of unprocessed copper and copper materials in China. Short-term pressure in the domestic market is inevitable, trending price increases overseas are expected to benefit overseas enterprises significantly. According to SMM and Mysteel data, the total export volume of aluminum and copper products affected by the policy reached 4.62 million tons and 520,000 tons from January to September 2024, accounting for 13.8% and 4.7% of domestic aluminum and copper demand, with the export increment of aluminum and copper reaching 650,000 tons and 290,000 tons respectively, accounting for 2.0% and 2.6% of the domestic demand for aluminum and copper. According to SMM estimates, as of November 13, the profit per ton of aluminum foil/aluminum plate/aluminum profile/aluminum ingot for export was +385 / +406 / +233 / -1080 yuan. With fierce competition in the domestic aluminum and copper processing industry and export profits already under pressure, we believe that the cancellation of tax refunds will inevitably put pressure on domestic metal prices and processing fees. According to Wind and Wood Mackenzie, in 2023, China's electrolytic aluminum and refined copper production accounted for about 59% and 44% of the global total, while aluminum and copper exports accounted for about 19.6% and 8.5% of overseas demand. The cancellation of tax refunds is expected to significantly intensify overseas supply pressure, driving significant increases in overseas metal prices and processing fees, benefiting overseas resource and processing companies significantly. International aluminum prices have already reflected this trend. In the long term, convergence of domestic and international prices is expected to support upstream profits, while the clearing of capacity is expected to benefit leading processing companies. In the long term, due to China's high dependence on overseas aluminum and copper, we expect international aluminum and copper prices to continue rising, approaching or even surpassing Chinese levels, supporting the recovery of export profits for Chinese aluminum and copper materials and providing support for the supply-demand situation and prices in China. Additionally, according to SMM, as of October 2024, the average capacity utilization rates for aluminum and copper companies in China were 63.8% and 64.6%, indicating significant overcapacity. We believe that the cancellation of tax refunds is expected to drive the gradual clearing of low value-added, high-cost capacity in the Chinese aluminum and copper processing industry, gradually improving the supply-demand situation and benefiting high-end product capacity and cost-control capable processing industry leading companies in the long term. Risk Factors: Overseas tariff policies are more severe than expected, leading to a greater decline in domestic copper and aluminum exports, and a sharper drop in domestic copper and aluminum prices and processing fees than expected, while overseas copper and aluminum prices and processing fees rise less than expected, and the improvement in the domestic copper and aluminum processing industry landscape falls short of expectations. Investment Strategy: The Ministry of Finance and the State Administration of Taxation have announced the cancellation of export tax refunds for aluminum and copper materials. This cancellation affects 94% of aluminum exports and 50% of copper exports in China, with a wide coverage. We believe that in the short term, the domestic aluminum and copper supply-demand situation and price pressure are inevitable. As overseas dependence on Chinese aluminum and copper is high, the trend of rising overseas prices and processing fees is significant, benefiting overseas enterprises. In the long term, the convergence of domestic and international prices is expected to support the improvement of China's aluminum and copper landscape, while the clearing of processing capacity is expected to greatly benefit China's leading aluminum and copper processing companies.