The impact of the strengthening Yuan

China's appetite for raw materials is widely expected to be whetted by the rising yuan, prompting the nation to pile its shopping cart even higher and feeding investor concern about the impact on demand and prices.

Commodity markets are sensitive to China's currency moves as the nation ranks first or second amongst the top purchasers of many traded commodities.

China, which let the yuan rise 3.6 percent in 2010, is expected to allow the currency to rise about 5.4 percent against the dollar in 2011 to combat inflation, a Reuters poll shows.

Following are analyst and trader comments on what the appreciation of the yuan means for different commodities.

GOLD

Analysts said that even though a stronger yuan is expected to boost China's purchasing power of commodities, including gold, a moderate pace of yuan appreciation is unlikely to have a significant impact on gold prices.

The yuan rate and gold prices lack a straightforward and direct correlation. If the yuan rate moves the gold market, that will be done through the move in the dollar. Chinas gold market is still basically a closed market, said Hou Xinqiang, an analyst at Jinrui Futures in China.

BASE METALS

"I can't see how revaluation can be anything but bullish, unless the increase is so great it crimps growth and we expect a modest, progressive rise," said Alan Heap, commodities analyst at Citigroup in Sydney.

"Copper and iron ore will be the winners, aluminum the loser at the other end of the spectrum."

IRON ORE

"I don't think it's going to have a great impact on Chinese appetite for iron ore. Strong Chinese demand will outweigh the fact that commodities in yuan terms have become effectively more expensive," said Rory MacDonald, head of iron ore operations at The Steel Index.

"I don't think it's going to dampen Chinese demand, certainly not if we're talking about an appreciation in the value of 5 percent. If it were more significant, perhaps it would have an effect but I think there are other factors at play that are going to swallow up any appreciation of the yuan and thus limit any impact that it's going to have on demand."

STEEL

"The rising yuan has become a major hurdle for Chinese steel exports now; The RMB appreciation and the lack of rebate support will lead to a sharp fall in steel exports from China, said Du Hui, an analyst with Qilu Securities.

China, as the worlds largest steel producer and exporter, used to export around 10 percent of its steel output to other world regions, but steel product exports consumed only 7 pct of total crude steel output for the first eleven months of 2010.

VEGETABLE OILS

Malaysian traders said a stronger yuan against the U.S. dollar will increase palm oils affordability for Chinese consumers and lead to higher export volumes.
But this is unlikely if import prices for palm oil are higher than domestic vegetable oil prices, Chinese traders said.

"Vegetable oils imports to China are expected to remain stable during the first quarter of this year despite a stronger yuan, as domestic prices are higher than import prices," said a trader with a Shanghai-based foreign brokerage.

RUBBER

The yuans appreciation will cut China's natural rubber import costs, but also reduce the competitiveness of tire exports, said Shen Xiaochun, an analyst with Guohai Liangshi Futures.

But generally speaking, the yuans appreciation on the price of natural rubber will be limited and would rather act as a catalyst (to the price trend), Shen said, adding that rubber prices have been rising although the yuan has been appreciating since July 2010.

COTTON

Lu Yun, a cotton analyst with Shanghai JCI, said yuan appreciation will be definitely negative to the textile export industry, which already has a low profit margin of below 5 percent, thus lowering the demand for cotton.
Cotton prices will be rising, and thus the textile companies will be struggling, he said.

SOYBEAN, CORN

"Investors are speculating that the yuan is going to appreciate against the dollar in the near term, especially with Hu Jintao's visit to the U.S. on January 19," said Ker Chung Yang, an analyst at Phillip Futures in Singapore.

"The appreciation of the yuan is going to increase the purchasing power of people in China, which means they will consume more of everything. Higher consumption of pork will require more animal feed."

"Last year at the end of June they decided to raise the yuan and we saw a spike in soybean and crude palm oil prices."

However, other analysts do not expect any major impact on farm products from the appreciation of the yuan.

Any benefit that China -- the largest importer and consumer of soy from the United States and South America -- may see in terms of lower import costs due to the appreciation of the yuan will be offset by surging global prices and tight supply, Shi Yan, chief analyst of farm products with Xinhu Futures, said.

"We do not expect any big winners in regard to farm products. The appreciation could benefit imports of other commodities, such as cotton and iron ore. However, textile exports would be hit."

FREIGHT

We believe continued appreciation in the yuan could lead to lower input costs throughout the Chinese industrial complex, potentially expanding margins and acting as a positive for commodity imports and freight rates, said Michael Webber, shipping analyst for Wells Fargo Securities.

A stronger yuan against the dollar would also boost U.S. exports to the worlds second largest economy, boosting freight rates for long-haul voyages.
Analysts, however, warned that U.S.-China tensions over the yuan could have a negative impact on freight rates if U.S. politicians successfully push through legislation punishing Chinese imports for exchange rate intervention. This could lead to a trade war between the two economic powerhouses and could significantly cut seaborne demand.

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