The Hindu Business Line : Metal sector may benefit from yuan revaluation

FINANCIAL and commodity markets had for long been expecting a revaluation of the Chinese currency (yuan). There was speculation over the timing of the move as also the extent of currency adjustment, with many expecting a 5 per cent revaluation.

In the event, it has turned out to be smaller than expected. The modest 2.1 per cent revaluation has taken the yuan rate to the dollar from 8.28 up to 8.11. But experts believe, there may be more to come.

The peg with the dollar has been removed and yuan is going to be pegged against a basket of currencies with a 0.3 per cent band around the central parity to be decided by People's Bank of China.

As China has become the world's largest consumer of base metals and with insufficient domestic resources, large imports of both refined metal and raw material are required. On the face of it, the currency adjustment might be expected to stimulate China's demand for commodities.

The revaluation is expected to prove mildly positive for LME base metal prices, although it can be argued that other metal market developments at present probably have more immediate implications on metal price levels, given the small size of the revaluation, experts said.

In the present high metal price environment, Chinese metal consumers have shown strong reluctance to buy, waiting for better opportunities in regard to both prices and exchange rates. Consumer stocks have been drawn down and demand deferred.

As it is becoming increasingly clear that base metal prices are not likely to trade significantly lower anytime soon, with both supply and demand developments turning strongly price supportive, a yuan revaluation, albeit small, could be regarded as a buying opportunity, according to Ms Ingrid Sternby, base metals analyst with Barclays Capital.

In the copper market, the yuan revaluation is likely to keep refined imports to China around high levels, leaving domestic availability good and possibly pressuring domestic prices lower despite robust underlying demand.

This would also leave an already tight western copper market even tighter. China is a net importer of all base metals except aluminium and lead, while a net importer of the raw material for both the metals (alumina and lead-in-concentrates).

While `cheaper' raw materials might encourage imports and higher domestic refined production, there is belief that there will be lower exports of refined product, given the relatively smaller impact on the cost component.

Aluminium producers of course are already suffering from adverse operating conditions given that the Government is now disallowing VAT-free alumina imports to continue due to domestic power shortages.

"We expect this will constrain primary aluminium exports in any case, and a yuan revaluation makes exporting aluminium even more unattractive," Ms Sternby commented.

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