Likely yuan rise to stoke commodities prices, demand

By Nick Trevethan – Analysis

SINGAPORE (BestGrowthStock) – The likelihood of a rise in the value of China’s yuan currency is growing daily, sharpening expectations for commodity markets to see price gains as Chinese consumers exploit their increased buying power.

Beijing faces international pressure to scrap the yuan’s peg, especially from Washington, which says the currency is seriously undervalued, sparking reports China may be about to revalue the yuan.

Raising the value of the yuan versus other currencies would cut the cost of China’s imports of dollar-denominated commodities such as oil, copper and iron ore, while making Chinese exports more expensive, but analysts said the net impact would be positive for commodity demand and prices.

The greatest impact will probably be seen in bulk commodities such as iron ore, metals such as copper and in soy, where China is a big importer and consumes most of the products made from those imports at home.

“The currency rise will hurt exports but will make imports cheaper. But that won’t matter to China and the net impact will be positive for commodities,” Jonathan Barrat, managing director of Commodity Broking Services in Sydney said.

“Long-term infrastructure development plans become cheaper and this will help focus on domestic markets and domestic growth. I think the yuan will continue to appreciate in the long term and will only serve to boost primary imports and that means a bull trend for these commodities.”

Even a rise of 3 percent in the value of the yuan, the range of increase discussed by a number of analysts, to around 6.60 to the dollar from last year’s average, would have a profound effect on China’s $244 billion commodity bill.

Last year the country spent around 607 billion yuan ($88.97 billion) on importing oil, 343 billion yuan ($50.28 billion) on iron ore and 206 billion yuan ($30.20 billion) on copper.

An increase of 3 percent in the yuan would have saved the nation some 56 billion yuan ($8.21 billion) on its commodity purchases, or enough to buy more than 1 million tonnes of copper.

China uses its centrally-planned economic power to control prices of certain products such as fuel but when international prices climb substantially the government has no option but to raise domestic prices, as it did this week for diesel and gasoline.

But analysts said it might be hard to reflect further rises in crude oil, unless the yuan strengthened.

“With the government suppressing domestic fuel prices, Chinese consumers will have little motivation to conserve, thus demand growth could accelerate,” said Gordon Kwan, Head of Regional Energy Research of Mirae Asset in Hong Kong.

“I don’t think this is yet priced in as global crude prices are still down 40 percent from their peak, and China’s prior mergers and acquisition deals are beginning to look like genius moves amidst rebounding crude prices. This could also translate into lesser oil product exports on a percentage basis.”

GONE FOR GOOD?

While viewed as a positive for most commodities, analysts said the effect on demand would vary depending on the product.

“When you are looking at consumption of food items, it is not such a huge impact as compared to something like manufacturing goods,” said Toby Hassall, an analyst at CWA Global Markets in Sydney.

But the longer-term implications of a stronger yuan may eventually be negative for commodities demand, said Nick Moore, global head of metals strategy at RBS.

The last time China raised exchange rates back in 2005, commodities saw a steady rally for more than a year after the revaluation.

In that time copper prices doubled to a then record high of $8,800 a tonne in 2006, chipping around half a million tonnes off copper consumption annually, analysts estimated.

“A revaluation could be a sell signal rather than a buy. Higher prices in the West won’t help people trying to boost their businesses and there should be no excuse for producers not to turn on the taps or face the wrath of consumers,” Moore said.

A second weight could land on commodity markets in the form of price-induced demand destruction, he added.

China has the luxury of lifting rates to curb imported inflation, which other nations cannot do, so higher prices could mean demand destruction.

“Already before any further recovery we face the specter of demand destruction. Consumers already view current prices with some concern, and as we saw in nickel and copper in the last run up … once it’s gone it’s gone forever.”

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($1=6.822 Yuan)

(Additional reporting by Naveen Thukral and Judy Hua; Editing by Michael Urquhart and Clarence Fernandez)

Likely yuan rise to stoke commodities prices, demand