Mixed prospects for China commodities market

The positive revaluation of the yuan by 2.1 per cent against the US currency on Thursday augurs well for the commodities market as it will strengthen the Dragon's power to eat, analysts and traders said on Friday.

The double whammy in the whole situation is that while the dragon is a net importer of most commodities, it is also a large exporter.

Thus, while its purchasing power may see a rise, following a depreciation of the US dollar, its exports may be slightly hit, said a Mumbai-based analyst.

Further, the revaluation has strengthened all Asian currencies (against the dollar) and thus, will make Indian imports less expensive.

PRECIOUS METALS When China pegs its currency against a basket of currencies including the euro in significant percentage, it is likely to liquidate some of its dollar holdings and switch over to the euro.

Anticipating this move, dollar depreciation began on Thursday itself and also led spot gold to rise. The depreciation in the dollar pushed up prices of all precious metals. Silver prices also rose in tandem with gold.

Today, overseas spot gold is up $1.05 at $426.90 a troy ounce while spot silver has risen 4 cents to $7.16 a troy ounce.

Market players are expecting the yellow metal to touch a high of $428 a troy ounce.

INDUSTRIAL METALS Currently, China has grown to become the world's largest consumer of base metals. It imports large quantities of required refined and raw materials.

China is a net importer of all base metals apart from aluminium and lead. A yuan revaluation, albeit small, could be regarded as a buying opportunity, said a Barclays Capital report, adding that despite the revaluation, Chinese consumers were expected to buy despite "higher-than desired price levels".

The dollar's depreciation is likely to boost import demand from Chinese manufacturers. Metal prices are thus, likely to see a positive movement.

A section of traders, however, feel the news may not be good for the industrial metals as it is likely to reduce Chinese imports, despite making them less expensive.

This is largely due to exports of processed industrial products. Thus, prices may fall on the London Metal Exchange, the largest non-ferrous metals exchange which is still struggling under the impact of the London blasts earlier this month, said Ramesh Aggrawal, a Delhi-based metals trader.

While the demand from the Dragon is seeing a lean season currently, it was expected to be up around end-October as the stocks in China begin to diminish. However, the industry will now be eyeing the extent to which the industrial metals' demand picks up.

AGRICULTURAL COMMODITIES Among agricultural commodities, China imports soyabean and cotton, largely from the US. '

Traders are divided on the impact the revaluation will have on Chinese demand of US soyabean. A section says that it will be hit and this will pull down prices on the Chicago Board of Trade (CBOT). Another section says that as the overall Chinese economy strengthens and its imports become cheaper, it will buy more and thus, lend strength to CBOT.

As expected, crude palm oil prices fell on Friday. Kuala Lumpur-based Bursa Malaysia Derivatives' October contract ended at 1,382 Malaysian ringgits, down 26 ringgits, and traders peg it to crash to as low as 1,360 ringgits.

However, most market players feel that the market will recover from the initial shock and will see an upward movement early next week, back to current levels.

News supporting this market view is the Malaysian ringgit which was earlier pegged against the dollar has now been put on float, soon after news of the Chinese revaluation came, a Mumbai-based trader said.

Among processed agricultural commodities, China mainly exports soyameal and rapeseed meal. Chinese exports of processed agricultural commodities soyameal and rapeseed meal will lose on competitive advantage due to loosened exchange rate.

Market players feel that India is likely to gain where China loses out.

Edible oil, gold may be hit

The revaluation may not directly impact commodities prices in India but a resultant weakening of the dollar vis-a-vis the rupee may lead to lower prices of edible oils and gold in the near-term, said an analyst from Anand Rathi Securities.

Initially, gold prices are rising on the back of overseas prices. Similar is the case of all other precious metals. But the rise will be curtailed, traders said, as prices of industrial metals are likely to soften as demand from the dragon may be curtailed.

While soyaoil imports may become slightly cheaper, that of palm oils are likely to be slightly dearer. On the impact of a possible in soya complex prices on CBOT, however, may not effect Indian market much as the imports to India are going to be slightly cheaper.