With Yuan Devaluation, China Digs a Hole for Commodities


China’s appetite for commodities from gold to crude oil to copper is likely to be hurt in the near term after the country’s surprise decision to devalue its currency.

Most commodities are priced in dollars, so a weaker yuan will raise the cost of imports for buyers in China, weighing on demand. Given China’s role as a huge buyer of global commodities—it consumes nearly half of the world’s annual output of metals, for instance—any drop in demand there is likely to put further downward pressure on resource prices, many of which are already at multiyear lows.

“In the short run, this [devaluation] is more bad news for commodity prices. A weaker Chinese currency is likely to mean weaker demand for internationally produced commodities,” said Paul Bloxham, chief economist for Australia and New Zealand at HSBC.

Many commodities suffered an immediate hit Tuesday after the People’s Bank of China’s action. The move also took a toll on the currencies of countries that depend on commodity exports; the Australian and New Zealand dollars each fell around 1% against the U.S. dollar.

Aluminum futures on the London Metal Exchange were down 1.8% to $1,583 a ton late in Asia, while copper dropped 2.3% to $5,173 a ton. Crude-oil futures were down 1.6% at $44.25 a barrel on the New York Mercantile Exchange late in Asia. Brent crude on London’s ICE Futures exchange fell 1.2% to $49.79 a barrel.

 “When oil becomes more expensive, it is likely to hurt China’s demand,” said Daniel Ang,investment analyst at Phillip Futures. “I think that there is definitely going to be more bearish momentum to what we are seeing now, and we could see oil prices fall further.”

Gold, which recently touched five-year lows, nudged higher Tuesday, up $3.80, or 0.3%, to $1,108 an ounce on the Comex division of Nymex midday in New York.

Some gold investors wagered that China’s move will force the U.S. Federal Reserve to delay raising interest rates. Higher rates, which would tend to further boost the dollar against the yuan, are expected to sap demand for gold, an investment that doesn’t pay interest.

Still, analysts said China’s move is likely to put downward pressure on gold, as the country accounts for nearly a third of the yellow metal’s global demand.

 “If anything it may worsen the gold demand,”Barnabas Gan, economist with OCBC Bank in Singapore, said of the yuan’s devaluation.

On the upside, a weaker yuan could boost Chinese exports and ultimately help the economy rebound, which would be broadly positive for commodities.

China has been encouraging its domestic producers of refined commodities such as aluminum products and steel to step up exports as a way to offset slowing domestic consumption.

“This decision is clearly signaling that China is trying to prop up exports,” said Mark Pervan, head of commodities research at ANZ Bank, adding that the devalued yuan could help support exports of downstream commodities such as steel, refined oil products and aluminum products.

Prices for iron ore, an ingredient in steel, could get a short-term lift. Exchanges don’t track prices of steel or aluminum products, but iron-ore futures on China’s Dalian exchange, which are denominated in yuan, rose Tuesday. The most actively traded contract was up 1.2% in Asian trading.

Given the devaluation, analysts expect a temporary divergence between that iron-ore futures price in yuan and the closely watched spot price, which is set in U.S. dollars once a day. Mr. Bloxham, from HSBC, said that, ultimately, weaker demand due to the softer yuan will hurt iron-ore prices, too.

Also pressuring iron ore is the fact that Beijing plans to shut several steel mills around the city ahead of a Sept. 3 parade to commemorate the end of World War II in China, although analysts say this event prompted a temporary surge in Chinese imports in July.

Still, the impact of a weakening yuan will be less important for the price of iron ore than efforts by Beijing to stimulate the economy directly, said Angus Nicholson, an analyst at IG in Melbourne. A lower currency ultimately would boost exports across the board, and not just in commodities.

“China really wants to hit that 7% growth target, and the move today appears to point toward more stimulus,” Mr. Nicholson said.

Any recovery over the longer term in China’s economy would be positive for commodity prices and help reverse the current spell of doom and gloom, said Helen Lau, Hong Kong-based analyst with Argonaut Securities.

—Rhiannon Hoyle in Sydney contributed to this article.

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