Weaker yuan to hit China steel feedstock imports
China's yuan fell by as much as 3pc over two days to 6.42 yuan/$1 before the People's Bank of China (PBC) intervened to halt declines today.
Iron ore market participants were sanguine, while the iron ore curve rose during the Asian day. "The impact is not apparent yet with iron ore traders still weighing the price impact of the yuan move. My feeling is that if the yuan devaluation is a one-off move then markets will just shrug it off, or there could be some minor impact," a Shanghai-based international iron ore trader said.
Some traders in China moved to break up dollar-denominated seaborne cargoes to smaller yuan-denominated parcels. "After the yuan was devalued, the price for port-side cargoes increased by around $2/t," a south China-based mill purchasing manager said. Costs also rose for imported ore in long-term contracts and financing, he said.
But the raised offers are not yet translating into higher prices paid in China, with mills holding bids flat for port-side material. "Mills are not accepting the higher offers, the bids are at the same level as before," a north China-based trader said, citing a port-side consignment of 61pc PB fines priced at Yn400/t before the devaluation and now Yn410/t.
But the impact of the devaluation is likely to be more marked in the coking coal and steel markets, where China is likely to account for 51pc of global production and 71pc of global output, respectively, this year, Australian bank Macquarie said.
Coking coal traders said buyers dropped their seaborne bids today in response to the devaluation. "I would expect the latest currency moves out of China to lower demand [for seaborne coking coal] and I expect [coking coal] prices to fall further," a European mill procurement official said today.
"We saw this coming. The Chinese economy is slowing down and the government has run out of tools to stimulate it, so the devaluation is the only thing they can do to boost exports," an international coking coal trader said. "That makes imported cargoes more expensive, and in an oversupplied market the shock will have to be absorbed by the producers."
The move will exacerbate the pressure on US coking coal mining firms, because a weakening in the Australian dollar-US dollar exchange rate, which closely tracked Chinese developments, would make US exports less competitive, a London-based market participant said.
But the currency move will not increase domestic Chinese demand for steel products, because overall demand for commodity steel continues to languish, amid overcapacity and weak consumption.
Traders expect export offers to eventually be cut after the yuan's depreciation, although the full impact of the 4-5pc devaluation — equivalent to $10-15/t for billet, rebar and hot-rolled coil — may not be passed on. The expectation of lower-priced steel exports is not limited to traders — Indian officials cited the exchange rate moves as a contributory factor to their decision to lift steel import duties today.
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