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

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