The Chinese currency is brushing six-month
lows against the dollar after trade relations with the US grew
frostier.
The yuan hit a low of 6.92 to $1 on May
23, down by over 8% year on year, but has since stabilized at
around 6.90 to $1 on May 24.
The downward movement in this tightly
controlled currency could support Chinese mineral producers'
margins, reduce dollar-denominated sales prices and ease the
effect of tariffs on exporters.
The yuan began to decline against the
dollar in the spring of 2018 after US President Donald Trump
announced
tariffs on imports of aluminium and steel in March 2018,
triggering a series of tit-for-tat tariffs that have since
drawn in a wide range of products.
China is a major producer of a wide range
of industrial minerals, including refractory products,
antimony, barite and rare earths, which leaves these markets
highly exposed to the dollar-to-yuan exchange rate.
The dollar exchange rate is a key feature
these markets. A stronger dollar against the yuan means that
miners and producers in China can accept a lower
dollar-denominated price for their exports, which makes Chinese
mineral producers more competitive.
China is also a major consumer of a
number of minerals produced elsewhere, including lithium,
ilmenite and iodine, where a weaker yuan limits Chinese buying
power.
The
weakening yuan is already having an effect on domestic minerals
prices in Asia, with Fastmarkets' price assessment
for spot
seaborne Asian antimony trioxide, min 99.5% Sb2O3 at
$5,600-5,700 per tonne fob China on May 21, down from
$5,800-5,900 per tonne fob the previous week.
The yuan regained some stability in 2019
concurrent with reports that trade talks were progressing, but
the currency took a sharp downward turn in April 2019 after the
US imposed fresh tariffs and the rhetoric between the nations
became increasingly hostile.
China’s onshore exchange rate
can trade up to 2% up or down in one day in a band set by the
central bank, which has given the Chinese central bank a way to
counter the effect of the tariffs.
The benefits of a weaker currency for
China's export market have been a particular bugbear of Trump,
who has often criticized China for currency manipulation. On
May 23, the US Department of Commerce issued a proposal to put
penalties on countries that, "act to undervalue their currency
relative to the dollar, resulting in a subsidy to their
exports."
This policy appears to be squarely aimed
at China, although a large number of developing countries have
some form of currency peg or control.