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How the devaluation will hit India Inc, importing nations

Rajalakshmi Nirmal BL Research Bureau | Updated on January 23, 2018

BL12_05_YUANNOTES   -  REUTERS

Aside from steel makers, tyre and power equipment firms will find it tougher to compete with Chinese imports

In a major move on Tuesday, China devalued its currency by almost two per cent versus the US dollar to bolster its flagging economy.

While this round of devaluation, alone may not have a substantial impact on India’s exports or metal prices, a series of such moves may have a ripple effect on the global commodities market, particularly importing nations including India.

Fall in commodity prices

China consumes about half the quantity of metals produced globally, gobbling up about 91 million tonnes of metals in 2012. As Yuan weakens, and imports become dearer, Chinese importers have yet another reason to go slow on consumption, aside from a weak domestic demand.

In commodities such as aluminium, steel and copper, the global market is already in a glut and a weakening Chinese demand will only further increase supplies and depress prices. In a Reuters poll in July, analysts estimated the surplus in aluminium to hit 325,000 tonnes in 2015, which was a ten-fold increase from their estimate of 34,000 tonnes in April.

In copper, they estimated a surplus of 194,000 tonnes in 2015 and about 262,500 tonnes in 2016. Prices of key industrial metals, including aluminium, copper and lead, have fallen by a sharp 20-25 per cent in the last one year. If China’s demand drops which looks likely, metal prices may fall further.

Raw material front

Falling metal prices will offer some respite to importing nations, including India. For instance, India imports about 12 per cent of its steel requirement. Of this, about 40 per cent is from China, according to the Ministry of Steel. Other commodities that are imported from China will also be cheaper because of the weaker Yuan. Companies and sectors that are raw material intensive will see the benefit of lower input prices trickling down to margins. Auto manufacturers and makers of consumer durables will be the key beneficiaries of falling metal prices.

Exporters may lose out

Business for Indian exporters may also get tough as they become less competitive in the global market. Indian exporters compete with Chinese players in products, including handicrafts, leather items, textiles and also gems and jewellery.

Already, Indian exporters have been seeing orders plummet in the last seven months, due to stiff competition from countries such as Bangladesh.

While some companies may gain on the raw material front, others will find it difficult to compete with cheaper Chinese products. In the last few years, China has been moving its surplus capacities to other countries. In 2014, China’s steel exports, for instance, increased 50 per cent year-on-year and made a strong 40 per cent increase in the first quarter of 2015, according to Capital Economics.

A weaker Yuan will only make its exports more competitive. China is estimated to have about 30 per cent excess capacity in steel. Aside from steel manufacturers, companies in India, that are into manufacturing of tiles, tyre, and power equipment will find it tougher to compete with Chinese imports. In tyres, for instance, import of truck and radial tyres in 2014-15 jumped to 7.8 lakh tyres, up about 60 per cent from 2013-14, with imports from China alone seeing a three-fold jump to 5.5 lakh tyres, according to the Automotive Tyre Manufacturers Association. The Indian radial tyre industry is already running at very low utilisation level because it has not been able to match prices of Chinese tyres. Players including JK tyres, Apollo Tyres, Ceat and MRF may feel the heat.

Similar is the case with power equipments. The data from Ministry of Power shows that Chinese suppliers provided a third of equipments required for the targeted capacity addition in 2014-15 in thermal power. So, players such as BHEL, L&T, Siemens or Thermax have already been facing tough competition from Chinese imports. In steel too, manufacturers are at ire over the mess imported products are creating.

The Centre hiked import duty on several categories of steel even recently, but still, according to industry experts, the imported flat steel products are a good $70-80/tonne cheaper.

(With inputs from Maulik Madhu and Parvatha Vardhini C)

Published on August 11, 2015

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