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Yuan’s fall to hit Indian metal companies’ pricing power

China is the biggest producer of metals and its currency movements can impact global commodity prices.

, ET Bureau|
Jul 24, 2018, 11.41 AM IST
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Yuan--
ET Intelligence Group: Until about a couple of weeks ago, metal analysts had generally backed local producers to make money for investors despite the sharp recent cuts in stock prices. For them, the pronounced slide was less structural than transitory, masking the likely effects of competitive currency devaluation by the ‘factory to the world’.

But with Beijing devaluing the Chinese Yuan to unprecedented levels to help its producers hurdle the newlyerected tariff walls, Indian manufacturers are staring at potentially lower prices for their output.

Since mid-June, the yuan has fallen more than 6 per cent, while aluminium, zinc and copper on the LME are down 19.4 per cent, 9 per cent, and 14.5 per cent, respectively. China remains the biggest consumer and producer of metals and its currency movements can impact global commodity prices.

This is because commodities are traded in US dollar. With a weaker Chinese unit, commodity prices in the local currency increase, leading to eventually declining demand and consequently lower global commodity prices in US dollar. Hence, the Chinese currency depreciation is highly deflationary for commodities across the planet. The US Fed, too, has become more active in the currency market, and its involvement may temporarily arrest the fall in commodity prices.

Yuan’s Fall to Hit Indian Metal Companies’ Pricing Power
But the bigger question concerns the future trend.

Analysts tracking Vedanta, Hindalco and Hindustan Zinc have retained ‘BUY’ or ‘HOLD’ on these stocks through the recent fall. These ratings have been based on earnings estimated at certain price levels. LME metal prices are now at levels below which the estimated earnings of these companies will be much lower than expected.

Most analysts, for instance, have assumed LME Aluminum prices of around $2,100 per tonne. Currently, LME Aluminum prices are $2,080 per tonne. Similar is the situation with other base metals that are now trading sharply below their 100 and 200 DMA.

Lower realisation could not only impact the profits of these companies, but also lead to derating for these stocks.

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