How will tax rebate raise impact PET botte chip market Raw White T/C Core Spun yarn

In the past weekend, Ministry of Finance and State Administration of Taxation issued the Notice to Adjust Tax Rebate for Part of the Products, among which, PET bottle chip’s tax rebate is raised from 13% to 16%.

PET bottle chip is taking a relatively large export share among polyester products, typically 40%. Hence impact on PET bottle chip is the largest.

Impact mainly comes from 3 points:

1. Price gap between RMB and USD feedstock may vanish gradually. So far, USD polyester feedstock is way higher than China domestic level. In the future, USD PTA and MEG may not enjoy much import advantage. Bonded goods and processing with imported materials might lose their edge. We’ve reached consensus that the news is a bear for USD polyester feedstock trading.

Some players deem USD raw materials and bonded goods trading will die out, which we think is too absolute. On one hand, PET resin plants that have integrated raw materials facilities can be counted on our fingers in China, mainly the several giants. The largest benefiters are enterprises that own a complete industry chain, like Yisheng, Far Eastern and Sinopec etc. PET bottle chip producers without integrated polyester feedstock units are more passive, as they need to gauge whether processing with import raw materials or choose general trade to use RMB raw materials is more cost-effective.

2. Players need to pay more attention to lock RMB exchange rate. So far, export tax rebate takes at least 3 months in China, while it may cost one year from application to actually obtain the money in some regions. Hence PET bottle chip plants typically lock profit through PTA futures, and delivery cycle shortens comparing with processing with import raw materials. Under the situation of absolute value, we assume polyester feedstock cost don't change, export enterprises will get 3% more tax rebate, to lift enterprise profit, or to some extent to lower export cost and sharpen China PET bottle chip’s competitiveness, thus encouraging export.

However, it doesn't mean that processing with import raw materials is completely useless. It could avoid part of the risks from exchange rate volatility. General trade may face more exchange rate risk as it adopts RMB to settle in China while adopts USD in overseas market. We think PET bottle chip enterprises shall focus more on locking the exchange rate. Under steady RMB exchange rate, general trade is recommended as tax rebate and VAT are offset.

3. For PET bottle chip producers, increased tax rebate may reduce part of export cost, but doesn't indicate a direct boost in export growth. On one side, PET bottle chip enterprises’ exploring strength is worth concerning. If the base doesn't enlarge, cheaper price won’t contribute much to exports growth. On the other, if China export price declines substantially, a large number of orders could be attracted within short, but anti-dumping duties collected worldwide are also worth attention.

PET product tax rebate adjustment