Commodities Comment:Yuan down,metal prices hurt

Feature article.

    A change in exchange rate policy by the Chinese authorities raises as manyquestions as answers but increases the possibility of a weaker period for theChinese yuan. Our base case remains for only a small devaluation, which willnot have a large impact, but in this piece we look at the risks to metal prices ifthe currency falls further.

    Latest news.

    Base metal prices fell significantly on Tuesday, wiping out yesterday’s rally astraders digested the Chinese yuan news. Zinc fell the furthest, down 4.1%,but nickel, copper and tin fall fell by more than 3%. In contrast gold andsilver gained, showing some signs of safe-haven demand. The PGMs beganstrongly but fell back later in the trading session.

    The Chinese new car market shrank in July YoY, that much we know. By howmuch depends on which data source and definition you prefer. The mostpositive of Tuesday’s releases was from the Chinese Passenger CarAssociation (CPCA), which pegged July’s retail sales of passenger vehicles(PV) as being down 2.5% YoY, slightly better than the 3.2% YoY fall in June.

    Less positive was that from the Chinese Association of AutomobileManufacturers (CAAM), which reported a 6.6% YoY fall in PV shipments (ourpreferred measure), the worst such decline since December 2008. Thedifferences between these measures can be explained by stock moves and/orexports. Finally the same organisation said that PV production fell by 11.6%YoY. Our China autos analyst Janet Lewis believes August’s YoY data couldalso be poor given a strong performance last year, but expects the marketshould turn up from September as the peak buying season arrives.

    Japan has its first operating nuclear power reactor since September 2013.

    Kyushu Electric restarted the No. 1 reactor at its Sendai plant on Tuesdaymorning, having met the new post-Fukushima safety standards and havingreceived the required national and local approvals. The plant is expected tobe operating at full capacity some time next month, while the No.2 unit at theSendai plant is expected to be restarted in October. We expect that thisrestart will also accelerate the process of other nuclear restarts in 2016. Interms of the uranium market this is a positive for sentiment if notfundamentals in the near-term, given massive power plant stocks. But clearlythese restarts are vital for long-term uranium market prospects. As morenuclear reactors come back, we expect a negative impact on oil and LNGdemand, which has been used in lieu of nuclear.

    CISA steel mill production slumped to the lowest annualised level sinceJanuary 2013 in the last 11 days of July, latest data shows. Production ran atjust 585mtpa, down 2.7% on the previous 10-day period and 8.8% lower YoY.

    This is likely a reflection of weak underlying demand conditions, poor marginsand the upcoming military parade in Beijing.

    Registration is now open for Macquarie’s annual LME Base Metals Summit,the lynchpin of LME Week. This will be held on 12th October between 2-5pmat the Grange St. Paul’s Hotel in London, and will include presentations fromthe Macquarie Commodities Research team plus Chinese market analysisfrom BGRIMM, the leading Chinese base metals consultancy.