China’s tax policy reforms propel mining gains; USD strength could pose risks

Mining giants saw a strong start to the week, the 47th week of the year 2024, buoyed by China's decision to eliminate the 13 per cent tax rebate on aluminium and copper semi-finished products exports. The policy change, announced on November 15, 2024, triggered a surge of over 7 per cent in London Metal Exchange (LME) aluminium prices, underscoring its immediate impact on global markets.

Citi, the leading global bank for institutions with cross-border needs, a global provider in wealth management, and a U.S. personal bank highlighted the move's implications, noting that removing the rebate will likely discourage the export of aluminium semi-finished products from China.

According to the bank, this policy shift is expected to initially raise the LME-Shanghai Futures Exchange (ShFE) ratio.

However, Citi tempered expectations for a sustained rally, pointing to the potential dampening effect of a stronger U.S. dollar in the months ahead. Analysts predict that while short-term price increases are likely, the long-term strength of the aluminium sector could face challenges as global currency dynamics come into play.

The decision by Beijing marks a significant moment for the global metals market, further intensifying the interplay between Chinese policies and international trade flows.

Citi Bank further stated that it is maintaining its 0–3-month aluminium price forecast at $2,600 per tonne (with a 4Q24 average of $2,500 per tonne). The bank anticipates that the bullish sentiment driven by the removal of tax rebates may subside, tariff concerns are likely to intensify in the coming weeks, and a resolution to Guinea's bauxite shipment challenges remains its base-case scenario.

Citi observed that a strong U.S. dollar has historically weighed on mining stocks, diminishing the purchasing power of major commodity-consuming markets. Additionally, a stronger dollar often leads to tighter global monetary conditions, creating further challenges for the mining sector. This dynamic was evident last week when the U.S. dollar index strengthened following the U.S. election results, coinciding with a decline in mining equities.

Citi's analysis of over two decades of data reveals an inverse relationship between the strength of the US dollar and the performance of miners' share prices. The six-month rolling correlation between commodities and the US dollar has consistently been negative and is now nearing its long-term average of -0.3.

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