Metal: Global prices to shoot up on higher yuan

China’s decision to allow its currency to appreciate may have come as a breather for metal prices, but the long-term impact of yuan appreciation onmetals prices is not that simple as it looks.

China’s purchasing power in the international markets will increase along with the yuan’s appreciation. China’s demand for commodities is driven by multiple factors, including real demand from manufacturers, construction industry and stockpiling besides speculative demand from traders. But buying based on real demand will not immediately be encouraged by the appreciation as bulk purchases by manufacturers are aligned to their order books.

China is the world’s largest manufacturer and importer of metals and their ores. The appreciation in yuan lowers the import price （in local currency） for Chinese users and consumers of metals. This is likely to boost Chinese metal imports, especially base metals such as aluminium, copper and zinc. This will help push up international prices of these commodities including those in India. This is a positive development for Indian metal and ore producers such as Tata Steel, SAIL, Sterlite Industries, Hindustan Zinc, Hindalco, Nalco, Sesa Goa and NMDC among others.

However, there is another side of the coin. Purchases are eventually determined by demand. If for some reason, the Chinese economy slows down from its frenetic pace right now or the investment boom there cools off, we may not see any uptick in international metal prices despite the recent appreciation in the yuan. Metal prices are already on a downward curve in the commodity exchanges since the beginning of the year due to concerns over sustainability of strong consumption in China. Having said that, downside from current level of $1,968/tonne for aluminium and $1,777/tonne for zinc is limited as prices are near the marginal cost of production.

In the Indian context, a bulk of the gains from the appreciation in yuan and the resulting surge in increasing Chinese imports will accrue to non-ferrous companies like Sterlite, Hindalco and Nalco as prices of copper, zinc and aluminium are more volatile compared to steel.