China's cabinet has approved a hike in the value added tax on metal ores to 17% from 13% starting on January 1st 2009 a move that could further hurt cash strapped metals firms.

The change, announced in a report posted on the Ministry of Finance, will hit small firms already struggling with reduced cash flows because of the global financial crisis.

The ministry did not release details of the VAT reform, but analysts, traders and smelters said they expect the hike to apply to both locally produced ores and to imports.

It is said that the hike would increase demand for cash, while small and medium sized smelters cash flows have fallen.

A trader said that the hike would increase cash demand for smelters by 30%, even though the smelters could pass on the cost increase to their finished products. A zinc smelter's cash payment would rise by about CNY 420,000 to nearly CNY 1.8 million when declaring customs for a shipment of 5,000 tonnes of zinc concentrate, based on metal price at USD 1,150 a tonne.

A Manager at the international trade department said that imports of lead and zinc concentrates may fall in the Q1 of next year. He said that reduced cash flows and low metal prices were already forcing Chinese lead and zinc smelters to cut production, with more reductions likely in coming weeks. The lead and zinc industries are dominated by small smelters in China. Copper concentrate imports, which are dominated by large smelters, however, may not fall on the hike.

A trader said that Imports of nickel concentrate and iron ores may remain soft in coming months, even without the hike, as China holds large stocks of the materials.