Alumar sells aluminium in Brazilian low-VAT market

Brazilian aluminium producer Alumar has strategically entered the low value-added tax (VAT) market in the São Paulo region since the beginning of 2024, market participants told Fastmarkets over the last month

In Brazil, states charge a VAT on sales and services – known as ICMS – and rates vary by state. P1020 aluminium ingot from Alumar and from Albras in the northern Pará state is usually sold into the São Paulo region with 12% state VAT; that is considered the “high-VAT market.”

Meanwhile, units from São Paulo-based Companhia Brasileira de Alumínio (CBA) are sold at 4% or deferred VAT and are said to be in the “low-VAT market.” The deferred VAT leaves tax collection to the end user rather than the aluminium producer. Meanwhile, imports mainly pay a 4% rate.

“Alcoa has a subsidiary in São Paulo, so they can sell at a low or deferred ICMS [in São Paulo]. It happens sometimes that a few opportunities appear in the market,” a trader source said. “For example, some extrusion companies opt to operate under the [Brazilian] simplified [tax regime], meaning they cannot use tax credits to offset ICMS. [The tax] turns into straight-out costs for that company. Buying ingots with deferred taxes helps them with that.”

“Alumar has been, since the beginning of the year, selling some products in the low-VAT market; they transfer it to São Paulo, where they sell it,” a second trader source said.

Another market participant said that Alumar can become more competitive by selling in the low-VAT market because it is a chance to open up to new clients who prefer to buy at 0% or 4% ICMS tax.

“For example, in the high-ICMS market, the company sells at a premium of around $140-150 [per tonne]; with the tax difference, it sells to the São Paulo and South Brazil markets for around $220-240 [per tonne]. Just by paying less taxes, you earn around $50-75 [per tonne more],” a third trader source said.

A fourth trader source said that some companies “sell to São Paulo with 0% [ICMS] and take [tax] credit… they do this to sell more material sometimes.” The source added that Alumar brings their material to São Paulo at 12% ICMS, takes the tax credit and sells it at 0% VAT inside the state.

“They only pay ICMS if they resell outside the state,” the source added.

An Alcoa spokesperson told Fastmarkets that the company fully complies with Brazil’s tax code and acts in accordance with the tax regulations of each state in which it is present.

“The company does not comment on commercial strategies and works to optimize the operational efficiency of its three units in accordance with the demands of the national market,” the spokesperson said.

Brazil’s complex tax system

ICMS is a non-cumulative state VAT, based only on the added value of a product in each stage of its production and sales, according to PwC’s website Worldwide Tax Summaries. The ICMS value owed is determined by calculating debts and credits related to that tax, such as the cost of purchased raw materials (which generates credits) and the value of the end product leaving the company’s premises (which generates a tax debt). In case the taxpayer upholds more debits than credits, the taxpayer will be required to pay tax on the difference between them.

There is a federal law regarding the state VAT, but each state has its own legislation and, therefore, its own rates. Generally, ICMS is collected by the state where the supplier of the goods is located, at rates in the range of 17-20%. In the state of São Paulo, ICMS is usually collected at 18%, but the rate for certain products can be higher (such as 25%) or lower (such as 12%).

Special rates apply to interstate sales, equivalent to 4%, 7% or 12% – instead of the state-defined rate – depending on the location of the supplier and the buyer, as well as whether the goods are imported, have a certain percentage of imported inputs or are domestically sourced. A 4% rate applies on all interstate sales of imported goods.

Headquartered in the northeastern Maranhão state, the refinery at Alumar is owned jointly by Alcoa (54%), South32 (36%) and Rio Tinto (10%). The smelter is owned by Alcoa (60%) and South32 (40%).

The Alumar refinery has a nameplate capacity of 3,860,000 tonnes per year, of which 2,084,000 tpy is Alcoa’s consolidated capacity.

Fastmarkets calculated its alumina index, inferred, fob Brazil at $527.42 per dry metric tonne on Friday June 28, down by 0.55% from $530.32 a day earlier.

New aluminium premium price assessments

Operations at the Alumar smelter restarted in mid-2022 after it had been closed for seven years. Its output was ramped up throughout 2023. It has an aluminium production capacity of 447,000 tpy.

In 2022, the Brazilian government ended a duty-free quota it introduced in 2014, essentially considering the country self-sufficient in primary aluminium production. As domestic material gained more importance amid diminishing imports, so did the difference between ingots sold with high and low VAT.

This is why, in March, Fastmarkets decided to split the current Brazilian aluminium P1020A delivered premium by launching two new domestic premium assessments to better reflect the two-tier market created by the different state VAT rates.

Fastmarkets’ fortnightly assessment of the aluminium P1020A premium, low-VAT market, delivered São Paulo region was $260-300 per tonne on June 25, stable since May 28.

The low-VAT market premium jumped by 11.54% week on week to $280-300 per tonne in May 14; it had also increased in the three previous assessments. On the other hand, the high-VAT market premium was stable to down.

Fastmarkets assessed the aluminium P1020A premium, high-VAT market, delivered São Paulo region was $140-160 per tonne on June 25, narrowing downward by 3.23% from $140-170 per tonne two weeks earlier.

The premium decreased by 4.62% on June 11 from $150-175 per tonne after being stable since its launch on March 5.

Fastmarkets’ assessment of the P1020A premium does not include VAT or any other tax other than import duties when applicable, but sales with 12% VAT are intrinsically done at lower premiums to compensate for higher taxes, while material with 0% or 4% VAT might be sold at higher premiums.

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