CHINA: Lower sliding-scale duty on cotton stimulates mills to use quotas
CHINA: Lower sliding-scale duty on cotton stimulates mills to use quotas

CHINA: Lower sliding-scale duty on cotton stimulates mills to use quotas

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The Ministry of Finance announced on a statement Monday that China would adjust some import and export duties starting Jan 1, 2019. The sliding-scale duty for cotton will be lowered modestly, to 2%-40% after the adjustment. Therefore, after Jan 1, price spread between Chinese and international cotton will enlarge, favorable to import cotton. Assumed that customs clearance and buyers’ payment occurs simultaneously, the higher the USD price is, and the larger the decrement of RMB price is. After the announcement, mills with sliding-scale duty quotas at hand intend to book forward shipments of foreign cotton, while traders show no much interests.

Imported cotton sales increase with large price spread
Under the background of trade war, domestic yarn and fabric markets began to weaken from Sep, and underselling appeared from Nov. Demand for cotton declined obviously and mills mainly consumed the stocks that were procured previously. ZCE cotton futures market has been constantly decreasing, and on-call cotton prices moved lower. But during Oct-mid-Dec, ICE cotton futures market was firm, so price spread between Chinese and international cotton (cleared under 1% tariff) continued to narrow to around zero. Therefore, the sliding-scale duty quotas that were allocated in Oct were hard to be used.

Imported cotton sales were bleak in Oct and Nov. In Nov, some traders began to undersell Australian cotton, and cut about 400-600yuan/mt, and mills accepted well. In mid-Dec, ICE cotton futures market tumbled affected by macro economy, and the major contract, Mar contract, slumped by 9% in 7 days. On-call cotton prices moved lower fast. Under the bearish sentiment, buyers will be hesitant somewhat.

On Dec 24, the Ministry of Finance announced on a statement that China would adjust some import and export duties starting Jan 1, 2019. The sliding-scale duty for cotton will be lowered modestly, to 2%-40% after the adjustment. Therefore, after Jan 1, price spread between Chinese and international cotton will enlarge, favorable to import cotton. Mills intend to book forward shipments of foreign cotton (price edge of imported cotton appears, so mills with quotas at hand will use quotas as the consumption of this season will influence the quota application next season). While traders show no much interests and focus on de-stocking on concern about high stocks and market volatility.

Assumption 1. Customs clearance and buyers’ payment occurs simultaneously
The calculation for sliding-scale duty is changed as below:
If duty-paid price is or above 15yuan/kg, a specific duty of 0.300yuan/kg (original value: 0.57yuan/kg) will be levied.

If duty-paid price is lower than 15yuan/kg, an interim duty will be as follows:
Ri=9.45/Pi+2.6%*Pi-1 (Ri≦40%) (original value: 9.337/Pi+2.77%*Pi-1)
Ri ---- interim duty
Pi ---- duty-paid price

After calculation, from Jan 1, 2019, the sliding-scale duty will be range from 2-40% (previously from 4-40%).

If the customs and buyers’ payment occurs simultaneously, that is to say the exchange rate when buyers pay tax and VAT to the customs is the same with the exchange rate when buyers pay the product value, then with the higher USD prices, the sliding-scale duty declines gradually to 2%, and the discount after the adjustment stabilizes at 297yuan/mt.

According to discount, when using sliding-scale duty quotas, high-priced Australian cotton has larger discounts (a few mills have interests to book forward shipments of Australian cotton).

Assumption 2. Customs clearance and buyers’ payment occurs in sequence
However, under most circumstances, the customs clearance and buyers’ payment occurs in sequence. Under the volatile RMB exchange rate, duty-paid price has big difference, so the discounts after the duty adjustment will fluctuate.

If USD price of imported cotton is 85cent/lb, the exchange rate of product payment is 6.9162 on Dec 24. Usually, the tax payment occurs firstly, then according to the chart, the RMB appreciates when buyers pay the product value compared with the tax payment, the discount is larger after the tax cut.

But if the product value has exceeded 15,000yuan/mt, that is to say the sliding-scale duty is fixed at 300yuan/mt, then the appreciation of RMB will lead to lower discounts.

Duty-paid price of imported cotton (buyer’s payment lags behind one month)
We calculate the duty-paid price difference after Jan 1 if the buyers pay the tax and the product value in sequence. The exchange rate to pay the tax is 6.9653 on Nov 23, and that to pay the product value is 6.9162 on Dec 24.

Duty-paid price of imported cotton
RMB exchange rate cent/lb yuan/mt yuan/mt 2019 2018 yuan/mt
tax payment product payment USD price Duty-paid price (Pi) Price under 1% tariff Price under sliding-scale duty Sliding-scale duty (Ri) Price under sliding-scale duty Sliding-scale duty (Ri) Price decrement
6.9653 6.9162 50 7678 8776 12070 40.0% 12070 40.0% 0
6.9653 6.9162 51 7831 8946 12305 40.0% 12305 40.0% 0
6.9653 6.9162 52 7985 9115 12462 39.1% 12457 39.1% 5
6.9653 6.9162 53 8139 9285 12532 37.3% 12532 37.3% 1
6.9653 6.9162 54 8292 9454 12603 35.5% 12607 35.6% -4
6.9653 6.9162 55 8446 9624 12676 33.9% 12685 33.9% -9
6.9653 6.9162 56 8599 9793 12749 32.3% 12763 32.4% -14
6.9653 6.9162 57 8753 9963 12824 30.7% 12843 30.9% -19
6.9653 6.9162 58 8906 10132 12901 29.3% 12925 29.5% -24
6.9653 6.9162 59 9060 10302 12979 27.9% 13008 28.2% -29
6.9653 6.9162 60 9213 10471 13058 26.5% 13092 26.9% -34
6.9653 6.9162 61 9367 10641 13138 25.2% 13178 25.6% -40
6.9653 6.9162 62 9521 10810 13220 24.0% 13265 24.4% -45
6.9653 6.9162 63 9674 10980 13303 22.8% 13354 23.3% -51
6.9653 6.9162 64 9828 11149 13388 21.7% 13444 22.2% -56
6.9653 6.9162 65 9981 11319 13474 20.6% 13536 21.2% -62
6.9653 6.9162 66 10135 11488 13561 19.6% 13629 20.2% -68
6.9653 6.9162 67 10288 11658 13650 18.6% 13723 19.3% -74
6.9653 6.9162 68 10442 11827 13740 17.6% 13819 18.3% -80
6.9653 6.9162 69 10595 11997 13831 16.7% 13917 17.5% -86
6.9653 6.9162 70 10749 12166 13924 15.9% 14015 16.6% -92
6.9653 6.9162 71 10903 12336 14018 15.0% 14116 15.8% -98
6.9653 6.9162 72 11056 12505 14113 14.2% 14217 15.1% -104
6.9653 6.9162 73 11210 12675 14210 13.4% 14320 14.3% -110
6.9653 6.9162 74 11363 12845 14308 12.7% 14425 13.6% -117
6.9653 6.9162 75 11517 13014 14407 12.0% 14531 13.0% -124
6.9653 6.9162 76 11670 13184 14508 11.3% 14638 12.3% -130
6.9653 6.9162 77 11824 13353 14610 10.7% 14747 11.7% -137
6.9653 6.9162 78 11977 13523 14714 10.0% 14857 11.1% -144
6.9653 6.9162 79 12131 13692 14818 9.4% 14969 10.6% -151
6.9653 6.9162 80 12285 13862 14925 8.9% 15082 10.0% -158
6.9653 6.9162 81 12438 14031 15032 8.3% 15197 9.5% -165
6.9653 6.9162 82 12592 14201 15141 7.8% 15313 9.0% -172
6.9653 6.9162 83 12745 14370 15251 7.3% 15430 8.6% -179
6.9653 6.9162 84 12899 14540 15363 6.8% 15549 8.1% -187
6.9653 6.9162 85 13052 14709 15476 6.3% 15670 7.7% -194
6.9653 6.9162 86 13206 14879 15590 5.9% 15791 7.3% -202
6.9653 6.9162 87 13359 15048 15705 5.5% 15915 6.9% -209
6.9653 6.9162 88 13513 15218 15822 5.1% 16039 6.5% -217
6.9653 6.9162 89 13667 15387 15941 4.7% 16165 6.2% -225
6.9653 6.9162 90 13820 15557 16060 4.3% 16293 5.8% -233
6.9653 6.9162 91 13974 15726 16181 4.0% 16422 5.5% -241
6.9653 6.9162 92 14127 15896 16304 3.6% 16552 5.2% -249
6.9653 6.9162 93 14281 16065 16427 3.3% 16684 4.9% -257
6.9653 6.9162 94 14434 16235 16552 3.0% 16817 4.7% -265
6.9653 6.9162 95 14588 16404 16679 2.7% 16952 4.4% -274
6.9653 6.9162 96 14741 16574 16806 2.4% 17088 4.2% -282
6.9653 6.9162 97 14895 16744 16935 2.2% 17226 3.9% -291
6.9653 6.9162 98 15049 16913 17077 300 17364 570 -286
6.9653 6.9162 99 15202 17083 17245 300 17531 570 -286
6.9653 6.9162 100 15356 17252 17413 300 17699 570 -286
6.9653 6.9162 101 15509 17422 17581 300 17867 570 -286
6.9653 6.9162 102 15663 17591 17749 300 18035 570 -286
6.9653 6.9162 103 15816 17761 17917 300 18202 570 -286
6.9653 6.9162 104 15970 17930 18084 300 18370 570 -286
6.9653 6.9162 105 16123 18100 18252 300 18538 570 -286
Source: ccfgroup.com

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