Overall demand more important than depreciation
The yuan's recent depreciation sent shockwaves through global financial markets, sparking concerns over faltering demand for commodities, but analysts said on Monday the impact on commodities markets may be limited in the long run.
On Monday, the People's Bank of China (PBC), the country's central bank, set the yuan's central parity rate at 6.3969 against the U.S. dollar, slightly stronger compared with Thursday's 6.4010 but still weaker by 2,807 basis points on a weekly basis.
Prices of commodities such as iron ore, copper and aluminum generally took a hit due to the weaker yuan last week.
Brent crude fell by 3.6 percent to $48.24 on August 11 when the PBC started the devaluation, with the yuan weakening by more than 1,000 basis points. It recovered moderately by 1.10 percent to $48.77 per barrel by the close on Friday.
Analysts generally attributed the decrease to investor fears that a weaker yuan will curb the demand for dollar-denominated commodities due to higher import costs.
However, Sun Yonggang, an analyst with Everbright Futures, pointed out that the depreciation may have a limited impact on global commodities markets.
"Fundamentally, the decisive factor for commodities markets is supply and demand," Sun told the Global Times on Monday.
"The PBC's yuan devaluation reflects the need to adjust the currency amid the country's slowing economic growth, which is disturbing for the commodities markets as China is one of the world's largest consumers of various commodities," Sun noted.
Goldman Sachs analysts Christian Lelong and Amber Cai wrote in a report that the impact on the market from China's devaluation was just a sideshow, according to a Bloomberg report on Monday.
Due to the continuing economic slowdown, the property and manufacturing sectors will remain weak, so China's commodities prices will continue to fluctuate at low levels in the future, Liang Yanhong, a senior analyst at Mysteel Information Center, said at an industrial event on Saturday.
Goldman Sachs also said in a research note on Friday that China's yuan devaluation signals that global economic conditions have taken a turn for the worse, thus generating downward pressure for commodities markets, according to Reuters.
Despite the fact that foreign exchange policy can affect commodities markets, China's domestic policy support, both fiscal and monetary, is also critically important to the markets, the bank said. Infrastructure investment currently accounts for about 25 percent of steel and 15 percent of copper demand in China.
"This demand has low sensitivity to yuan-denominated prices and hence depreciation likely has limited effects. But removal of fiscal support and a more rapid deleveraging would result in a rapid decline in steel and copper demand," it said.
Qian Yi, an iron ore analyst with Shanghai-based steel intelligence provider SteelHome, told the Global Times on Monday that even though the yuan depreciation will increase import costs for dollar-denominated commodities, materials such as imported iron ore that still have a big price advantage compared with domestic supply will not be much affected.
According to data from the China Iron and Steel Association, domestic iron ore fines were priced at 532.45 yuan ($83.27) per ton on Monday, while the CIF (cost, insurance and freight) price of imported iron ore fines was at $55.75 per ton.
Meanwhile, Goldman Sachs analysts also wrote that iron ore prices may tumble about 30 percent over the next 18 months as supply expands while demand falters in China.
Since China is the largest consumer of iron ore in the world, its demand will be the main factor affecting prices, Qian noted.
