Posted on 17 Aug 2015
China, the world’s biggest producer of aluminum and steel, has sharply increased exports of the metals this year in response to production overcapacity and the country’s slowing economy.
Now, following Beijing’s devaluation of the yuan, markets are bracing for possibly more-aggressive exports in the price-sensitive metals industry. How much more market share Chinese producers might grab—exports have already risen more than 25% this year—will depend on whether the yuan falls farther than the initial drop.
By itself, a 3% shave in the yuan’s value against the U.S. dollar may not spur more overseas sales, analysts said, although the currency’s drop adds a new sprinkle of competitiveness to Chinese producers, whose exports are already sparking calls from politicians in the U.S., Europe and India to take punitive trade action.
Global commodity prices dropped sharply after the People’s Bank of China reset the yuan’s exchange rate early last week. Traders and analysts say that was a reflection of concerns over a slowing Chinese economy—China is a huge consumer of raw materials—and the higher cost of imports in yuan terms.
Weakened by the devaluation, crude oil prices on the New York Mercantile Exchange fell to a more than six-year-year low of $41.35 a barrel last week. Copper and aluminum futures on the London Metal Exchange also tripped to six-year lows of $5,062 a metric ton and $1,553.50 a ton, respectively, leaving them down 19% and 15%, respectively, in 2015.
After allowing the yuan to fall around 3% against the dollar, China’s central bank said the currency should stabilize and that there was no basis for further weakness. Global steel prices may dip as a result of China’s move, said Ivan Szpakowski, Hong Kong-based analyst with Citi Research.
Economists said China’s exchange-rate realignment is designed in part to spur the country’s exports. The metals industry is one sector where China’s exports were already sizzling. Its aluminum exports in the first seven months of the year have climbed 28.3% to 2.87 million metric tons, while exports of steel products were ahead 26.6% to 62.13 million tons, according figures from Citi Research.
ENLARGE
A worker helps load steel bars onto a truck at warehouse of the Baifeng Iron and Steel Corporation in Tangshan in China's Hebei Province earlier this month. Photo: REUTERS
Market analysts said they doubt that the immediate currency changes will have an impact on trade trends in industrial metals. “I don’t think the yuan devaluation is significant enough by itself to sharply increase exports of steel and aluminum,” said Ilya Feygin, managing director at Wallachbeth Capital. “I think the yuan devaluation will be more controlled from this point and China will step in to meet the threat to financial stability.”
The metals markets globally are feeling the impact of significant production capacity increases by China’s big metals makers in recent years, moves that have left many with too much capacity just as the domestic economy slows and demand falls away from sectors like the home building industry. The result has been a flood of cheap Chinese steel onto world markets.
That in turn has riled steel producers in many nations. India, for example, increased the import tax on some steel products last week for the second time in as many months.
“Particularly for steel, the situation has been that the relatively cheap Chinese exports going into Europe and North America have been getting a lot of resistance from these countries,” said Daniel Hynes, an analyst at Australia and New Zealand Banking Group Ltd. “Even if Chinese exports are cheaper, their ability to benefit from a weaker renminbi may be negated by World Trade Organization-type action.”
The U.S. steel industry has also been stepping up efforts to challenge Chinese imports. Major U.S. producers say cheap imports have undercut their prices, forcing them to idle plants and eliminate thousands of jobs. China’s exports are also putting pressure on producers in nations such as Japan and South Korea that rely on the U.S. market, where the economy is growing and the U.S. dollar is high.
A group of major U.S. steelmakers, including United States Steel Corp. , Nucor Corp. , Steel Dynamics Inc., ArcelorMittal USA, AK Steel Corp.and California Steel Industries, has filed trade complaints with U.S. International Trade Commission and U.S. Department of Commerce, seeking punitive tariffs on cheap Chinese steel.
In May, the European Commission levied provisional tariffs on some steel products from China, Russia, the U.S., Japan and South Korea. Earlier in the year, the commission took similar action on other steel products from China and Taiwan, in one case, and China specifically on two others.
Increasingly, complaints of selling below costs, or dumping, are being made to the Geneva-based World Trade Organization. There were 89 cases filed last year alleging that China or other trading partners sold products including steel and aluminum below cost. That was more than double the 43 cases filed in 2010.
“Obviously, the situation with Chinese exports is ever-evolving and something we’re watching carefully,” said Matt Meenan, director of communications at the U.S.-based Aluminum Association, which represents primary aluminum producers in the U.S. and other countries.
But while the yuan is one more challenge for the global metals market, it would take a considerable fall in the currency to create a new tidal wave of Chinese exports that some predicted immediately after the devaluation hit markets, analysts at ANZ said.
It is worth remembering that the yuan has already been “incredibly strong” against most global currencies, notes Blu Putnam, the chief economist at the CME Group, the Chicago-based exchange where several metals futures contracts trade. Mr. Putnam said the small reduction in the yuan’s value was unlikely to stir significant activity, such as with large importers like Brazil that face their own economic weakness.
Another spike in exports, however, would ripple across the globe.
Australia’s BlueScope Steel Ltd. said it was already struggling to keep its Port Kembla operation, that country’s largest steelworks, competitive against cheap steel from elsewhere and is trying to come up with “a game-changing approach” to reduce costs and keep the mill running.
