China's metallic gift to India - appreciation of Yuan

After a long global political battle, China’s decision to open (appreciate) its currency have come as a breather for metal prices, but the long-term impact of Yuan appreciation on metals prices may not be as 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 such as real demand from manufacturers, construction industry and stockpiling besides speculative demand from traders. However alignment to bulk orders may not encourage buying based on real demand due to appreciation.

China being the world’s largest importer of metals and ores, appreciation of Yuan will lower the import price of metals for Chinese importers and manufacturers. This will potentially help push up international prices of these commodities (including in India). This is a positive development for Indian metal and ore producers.

However, purchases are eventually determined by demand. Metal prices are already heading southwards due to concerns over sustainability of strong consumption in China. Any slowing down in Chinese economy may lead to no rise in international metal prices despite the appreciation in the Yuan. Although, 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.

For now, Indian metal companies and investors can only be positive courtesy China.

Reference: The Economic Times, Kolkata, 23-Jun-2010

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