China ends export tax on rare earths and other metals

China will eliminate its export tariffs on rare earths and other metals, the Ministry of Finance said on Thursday, ending a controversial policy that caused a diplomatic row and international trade dispute.

Export restrictions on rare earths, first proposed as a way to build China's industry and prevent the depletion of strategic raw materials at cheap prices, flared into an international trade issue after an abrupt reduction in export quotas in 2010 left traders short.

The resulting surge in prices triggered an international debate on the strategic value of rare earths, used in military and high tech applications, and helped revitalise rare earths mining and processing in other countries, including Australia, Indonesia and Malaysia.

Eliminating the tariffs is part of a more general streamlining designed to reduce the red tape that allows corruption to flourish at government departments and state-owned enterprises.

China cut its quota on rare earths exports this year after the country lost a case brought against it at the World Trade Organisation. China is home to most of the world's deposits of the 17 minerals classed as rare earths.

But while international trade officials may cheer the end of the tariffs on rare earths such as tungsten and molybdenum, the end to tariffs on aluminium products could lead to new trade frictions.

Taxes on certain aluminium alloy rods and bars will be reduced from 15 per cent to zero, the Ministry of Finance said.

China's aluminium industry struggles with severe overcapacity but Chinese exports could further undercut the profits of aluminium product manufacturers worldwide, such as Rio Tinto and Alcoa. The US slapped duties of about 33 per cent on Chinese extruded aluminium products after extrusion shipments doubled in 2009 compared with the year before.

Exports of semi-processed aluminium products from China flooded into world markets last year, putting pressure on global prices and premiums. That flow started to ease last month but Thursday's notice did not mention any change in the tax refund that has incentivised the trade.

Alcoa said this month it expects a surplus of 326,000 tonnes this year, after forecasting a deficit in January. Shares in the company have fallen 14 per cent this year.

In contrast, shares in China's largest producer Aluminum Corp of China, or Chalco, rose 10 per cent on the tax cut news on Thursday. The company's shares are up more than 50 per cent this year.

"I think it's indicative of the direction of policy as they want to keep supporting their domestic aluminium producers," David Wilson, an analyst at Citi, said. "They are clearly prepared to let larger and larger volumes of aluminium be exported."

Earlier this month, China reduced power prices for coal-fired power plants and cut the resources tax it charges iron ore miners. The power price cut was seen as a boost to large state-owned aluminium producers such as Chalco, which reported a loss of Rmb16.2bn last year.

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