Part II: What Appreciation of the Yuan Means for Minor Metal Prices
Recent reports by Strategic Metal Investments Ltd. (SMI Ltd.) have measured the principal and growing role that China now holds as producer and supplier of the world’s minor metals. As a result of this position, Chinese economic, monetary and exchange rate policies invariably impact the international prices for most minor metals, including rare earth elements (REEs). In this, the second half of our report on minor metals and exchange rates, we discuss exactly how further appreciation of the Chinese yuan (also referred to as the renminbi or RMB) is expected to affect international prices for specific minor and strategic metals.
Due to the geographic limitations effecting extractive industries (mining, oil and gas), as well as the long development timelines and high costs associated with developing new resources, minor and strategic metal end-users do not have the option of searching out country’s with lower costs of production. In the case of many minor metals, particularly REEs and antimony, little to no option outside of China is currently available. Consequently, expected appreciation of the yuan against the US dollar and other major currencies will have a very direct impact on most minor metal markets. In order to effectively examine the impact of the yuan’s appreciation on international prices for minor and strategic metals, we must first look at the level of ‘China dependency’ for each metal. Simply put, the greater the Chinese involvement in the industry, the more immediate exchange rate appreciation will likely have on the international prices of any minor metal. Table 5 below categorizes various minor metals depending on China’s relative global production and consumption levels.
From Table 5 one can begin to analyze the potential immediate impacts of a RMB appreciation on various minor metals. Looking at the first quadrant, in the upper-left corner, we see those metals for which the Chinese market is both a major producer and a major consumer, including antimony, indium, rare earth elements, silicon and tungsten. In isolation, an appreciation of the yuan can be expected to result in an increase in prices for these metals equal to the amount of appreciation. This is because, while China is a price-maker for these markets, international prices are still primarily negotiated and determined in US dollars. A RMB appreciation, therefore, is equal to an immediate rise in production costs when measured in US dollars. Moreover, because China represents a major consumer market for these materials, and an appreciation of the RMB against other currencies strengthens the purchasing power of domestic Chinese purchasers, it can be expected that a stronger RMB will result in less material available for international consumers and, consequently, higher international prices.
In the lower right quadrant, we have metals for which China is not a significant producer, nor a large consumer. The limited number of minor metals in the quadrant is indicative of the major role that China plays in the minor and strategic metals industry. However, at this time China is a relatively small producer and consumer of lithium and titanium, making it is easy to understand why expected continued appreciation of the RMB will have little direct impact on the international prices for these metals.
China represents either a large percentage of global production or a large percentage of consumption for each of the final two groups of metals. What this means is that either the production costs of a primary producer or the purchasing power of companies representing a significant quantity of annual orders is directly impacted by an appreciation of the RMB. While primarily produced in China, the largest consumers for both the metals in the upper right quadrant – bismuth and germanium – remain the US, Europe and Japan. The impact of a RMB appreciation on international prices for these metals will be significant for two reasons: (1) As the primary producer of refined bismuth and germanium, Chinese producers are price-makers in these markets, meaning that their end-users have few other options but to accept the increased costs. And (2), because of the slow economic recovery, the primary markets for these two materials, prices for bismuth and germanium products have been persistently low for nearly two years. With low prices keeping profit margins very thin, Chinese producers of these metals have little room, or desire, to offset price increases brought about by an appreciation of the yuan. For these reasons, it is highly likely that the full extent of the yuan’s appreciation will be passed on to international consumers of bismuth and germanium.
Finally, in the bottom left quadrant we have listed those metals that China imports in large quantities but only produces in limited quantities domestically: Chromium, cadmium, tantalum, selenium and manganese. A number of dynamics must be considered in order to evaluate the effect of RMB appreciation on these materials; What is the size of the Chinese market, relative to global demand, for each product? If China is the world’s primary consumer, then how concentrated is the domestic market. Finally, we must make a distinction between the effect on international prices for raw materials (ores and concentrates) that are being imported and the refined materials produced in China that are being exported.
The markets for each of these metals are unique although there are some important similarities between the cadmium and selenium markets, as well as between the chromium and manganese markets, which help us explain the potential effects of yuan appreciation on international prices for these materials. China represents the primary market for cadmium and selenium, both of which are normally traded and imported in their refined forms. Demand within China is not highly concentrated, allowing prices to rise more naturally in periods of high demand (or low supply), as the past year has shown. Increased purchasing power for companies in China resulting from the yuan’s appreciation, in combination with the currently tight supply for both products, may allow producers an opportunity to raise prices for refined cadmium and selenium, although we don’t expect US dollar prices to rise at a rate equal to the appreciation of the RMB. In the case of chromium and manganese, China primarily imports raw ores, refines material domestically and then exports ferro-chrome, ferro-manganese and other high purity forms of manganese. Despite strong demand from China, global production chrome and manganese ore is not sufficiently concentrated to allow producers to capitalize on greater purchasing power provided to Chinese buyers by raising prices. International prices for refined chrome and manganese products from China, on the other hand, will be forced up. Due to the prominent role China plays in producing and supplying the world market for refined manganese and chrome products, the result will be upward pressure on international prices. If demand in the international market for these refined materials supports price increases, it can be expected that prices in the ore markets will follow-suit.
Although this report presents a very simplified view of each particular metal market, its main purpose is to highlight the key factors that will determine the scope and extent that appreciation of the yuan may have on various minor and strategic metal markets. The results are based on assumptions that the RMB will appreciate between five to ten percent against the US dollar by late 2011 – as discussed inPart I – and that current market trends continue. However, as anyone who trades in minor metals knows well, market conditions can change abruptly. To stay up to date with major market changes, watch for more specific market reports and commentary from Strategic Metal Report in the coming months.