China will cancel value-added tax (VAT) export rebate on some aluminium products that currently stand between 8% and 11% on July 1, according to a Ministry of Finance announcement yesterday, which has led analysts to comment that the policy will aid in the restructuring of China's aluminium industry and have a positive influence on aluminium prices in the long run.

The MOF announced yesterday that VAT export rebates on aluminium rod, bar, profile and aluminium alloy rod, bar and profile in tax code 7604 and 7605 will be cancelled on July 1. However, aluminium strip and foil will be exempt from this policy.

"Although the stock price of major listed aluminium smelting companies tumbled yesterday, they will benefit in the long run as many small smelters will be forced out of the market because costs will increase under the new policy, Guosen Securities analyst in Beijing, Zheng Dong, said.

The stock price of Shenzhen-listed Yunnan Aluminum fell by 5.19% while Shenzhen-listed Shanxi Guanlu Aluminum recorded a dip of 6.28% by yesterday's close.

Many domestic smelters have since started fabricating electrolytic aluminium into semi-finished products for export, following the 15% tax on aluminium exports that came into effect on Nov. 15, 2006.

"The new policy will accelerate aluminium industry reform to focus on high value-added products instead of low value-added ones. I believe major aluminium smelters and fabricators, such as Chalco, will greatly benefit from a reduced number of players in the market," Zheng said.

Although domestic aluminium prices will probably drop in the short term, they will recover and remain at high levels in the long run, mainly due to high power prices, the high cost of environmental pollution control, as well as strong demand from downstream industries, he added.

Ren Yunhe, analyst with Shenyin Wanguo Securities in Shanghai, commented that the policy would be positive for the outside aluminium market, but negative for the domestic market in the short term as China will export less aluminium products.

Aluminium ended fractionally higher on the London Metal Exchange (LME) overnight Tuesday at $7,206 per tonne. The most traded September contract closed at RMB 19,320 ($2,536.10) per tonne yesterday, shaving RMB 10 ($1.31) from yesterday.

However, Ren pointed out that the current price difference between domestic and international markets will only expand in the future, triggering increased aluminium product exports in the long term.

He also agreed that large-scale aluminium smelters and fabricators will not be significantly affected by the policy ultimately. "Aluminium strip and foil producers such as Nanshan Aluminum Co. Ltd. will be able to raise prices as their prices are based on rising LME aluminium prices," he said.