(Reuters) – China’s move to make its yuan currency more flexible should be mildly bullish for many commodities, boosting China’s purchasing power and possibly increasing its imports of copper, iron ore and chicken.
Although China made clear on Saturday that a one-off step change in the rate similar to 2005 wasn’t in the cards, analysts expect the yuan to slowly rise, adding to its nearly 20 percent gain since its last revaluation in 2005.
“Should be a positive, as it was in prior years,” said Fred Demler, head of commodities for MF Global.
China’s huge appetite for raw materials has been one of the main drivers of commodity prices in recent years. China is the world’s second largest consumer of oil, using one in every 10 barrels produced. China is also the top consumer of iron ore, copper and aluminum.
When China raised its exchange rate in 2005, by 2.1 percent, commodities rallied for more than a year after the revaluation, although not solely because of Beijing’s move.
Copper prices steadily climbed and eventually more than doubled to what was then a record high of $8,790 a metric tone in 2006.
The Reuters-Jefferies CRB index .CRB of 19 commodities rallied 10 percent in the six weeks after China ended its decade-long peg in July 2005. Crude oil rose more than 20 percent, or $12 a barrel, in that period.
Because China will not institute a rapid change in the yuan’s value as it did in 2005, any commodities rally is likely to be more muted and affected by whether signs of economic recovery around the globe continue.
“I think we will see an initial pop (in crude prices) but I think it is going to be a short lived,” said Phil Flynn, an analyst with PFGBest Research in Chicago. Crude prices could initially move up to $83 a barrel from Friday’s close of $77 on the news before easing lower again, he added.
In what was seen as a largely political move to deflect criticism of its fixed exchange rate ahead of the G20 meeting next week, the central bank indicated it was ready to break a 23-month-old dollar peg that has come under intense criticism from the United States and other countries.
Even a small rise in the yuan could shave billions off the cost while raising the volume of China’s commodity purchases.
Last year, China spent $89 billion on oil imports, $50 billion on iron ore and $29 billion on copper. A 3 percent increase in the yuan could save Beijing $5 billion on just those materials.
U.S. MEAT EXPORTS MAY RISE
“China’s economy is experiencing explosive growth and Beijing has taken several key measures in recent years to curb that robust growth.
“Allowing the yuan to be more flexible is simply another calculated measure to achieving that goal,” said Adam Sarhan, founder and chief executive of New York’s Sarhan Capital.
In addition to stronger demand for crude oil and metals, China may import more U.S. meat and livestock feed — assuming trade disputes over pork and chicken can be resolved.
Following the July 2005 revaluation of the yuan, U.S. pork exports to China rose 14 percent in the third quarter of 2005 from a year earlier and 23 percent in the fourth quarter, according to U.S. Agriculture Department data.
Chicken exports rose 75 percent in the third quarter of 2005 versus 2003 and 84 percent in the fourth quarter. Chicken exports to China were unusually low in 2004.
“In the longer term, this will be supportive to U.S. exports, including meat and poultry,” said Jim Robb, an economist at Livestock Marketing Information Center. “But we have these short-term issues so it’s not an immediate boost.”