As the yuan falls, seaborne iron ore slows

The yuan fell to Yn6.77 to the dollar on 19 July, its second one year low in as many days. The yuan is now well below the level of Yn6.70 that currency traders had said last week could spur China's central bank the PBOC to intervene to support the currency.

The weaker Chinese currency makes it more expensive to buy dollar-denominated iron ore cargoes using yuan. Portside iron ore traders are particularly reluctant to buy seaborne ores, as they will make losses selling these cargoes in the yuan-based portside markets amid ample stocks and modest demand for most medium and low grade fines.

Portside trading will not be profitable unless portside iron ore prices rise in the near future or seaborne prices correct sharply, said an east China-based trader.

Concerns about an escalation of the tariff war between the US and China are the immediate driver of weakness in the yuan, but signs of slower growth in the Chinese economy are also having an impact. Industrial output growth in China dropped to 6% in June from 6.8% in May, while real estate investment growth slowed to 9.7% in January - June from 10.2% in January - May. Infrastructure investment has also been slowing over the past few months and is currently around 7%, compared with 19% last year.

Slowing growth could prompt the PBOC to ease monetary policy and pump more credit into the banking system, in a departure from its stated goal of reining in private and public debts. Looser monetary policy tends to weaken a currency by increasing availability of cash in the economy.

Chinese companies are facing a severe liquidity crunch that could prompt the PBOC to increase medium-term lending facilities to banks by Yn4.2 trillion ($620bn) over the next 12 months, Singapore bank DBS said. The PBOC has asked banks to step up lending to smaller companies, many of which are struggling financially. A PB fines tender was concluded on 18 July at US$62.27/dry t, which would translate to a portside price of Yn480/wet t. The PB fines price in the portside market was around Yn460 - 465/wet t. These sharp price differences mean mills now prefer to buy portside fines rather than seaborne spot cargoes, said a Beijing-based trader. "My information is, except for mills that have booked long-term contract cargoes or are situated away from ports, all other mills are buying ores exclusively at ports," added the trader.

The yuan could slide to Yn7 to the dollar in the near-term, some market participants said. This would force portside traders to raise offer prices to make profits.

Mills will now slow iron ore purchases unless absolutely necessary, said the manager of a Hebei-based steelmaker. The mill has shelved earlier plans to sell some seaborne cargoes in the portside markets.

Steel mills are making robust profits of around Yn800 - 1000/t, which will encourage them to keep output rates at near-peak levels. Mills are unlikely to curb output because of yuan fluctuations but will instead keep iron ore stocks at lower levels in the near-term.

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