For some time, the exchange rate of the RMB against the US dollar has appreciated considerably. The main driving factors for the appreciation of RMB are the Fed’s monetary release, the depreciation of the US dollar, the improvement of China’s economy, the expansion of trade surplus, the large spread of Sino-US bonds, and the large inflow of capital into China. Among all these factors, the depreciation of the dollar is the most important direct factor. Looking forward to the trend of the dollar in this year, investors’ risk aversion will weaken under the expectation of global economic recovery. Combined with low interest rates from the Federal Reserve and further deterioration in fiscal spending following the U.S. government’s unprecedented fiscal stimulus, the dollar is widely seen as likely to weaken further, with some seeing another 5% to 10% decline in 2021. As a result of the above factors continue to exist, the future exchange rate of RMB against the US dollar will continue to inertial small appreciation.
Apart from other factors, what impact would a mere appreciation of the renminbi against the US dollar have on the Chinese steel market? The preliminary analysis includes the following six aspects:
1. Stimulate imports and discourage exports. A stronger renminbi against the dollar would lower the cost of imports and raise the cost of exports. As a result, it is bound to produce iron ore, scrap steel, billet, steel and other iron elements import incentive, and inhibit the export of steel and steel consumption products. Since last year, China’s steel and black series of commodities import and export situation has partially appeared this change. According to the General Administration of Customs, China imported more than 20 million tons of steel in 2020, up more than 60 percent from the previous year. In the first four months of this year, China’s steel imports rose 17 percent year on year. With the national macro-control policy, China’s steel and black series of commodities import and export situation of the above changes, will be strengthened because of the appreciation of the RMB exchange rate against the dollar, is expected to this year the country’s steel imports may be close to 30 million tons, continue to present a relatively large growth situation.
2. Suppress domestic steel prices to rise too fast and too sharply. Iron and steel elements import increase and export is suppressed, in the case of other supply and demand factors unchanged, of course, ease the domestic steel market supply and demand, and produce the corresponding expectations, thus suppressing the domestic steel prices too fast, too fierce rise. Before the national steel and black series of commodity prices fell sharply, the renminbi against the dollar exchange rate appreciation is also a pressure.
3. Beneficial to “carbon peak” and “carbon neutral”. After the appreciation of the domestic currency to stimulate imports and inhibit exports, domestic supply and demand with the help of the international market channels to improve, is bound to reduce the pressure on domestic steel enterprises to increase production. The corresponding slowdown in the output growth of domestic steel and mining enterprises will also reduce their carbon emissions, thus helping decision-making departments to achieve the strategic goals of “carbon peak” and “carbon neutral”.
4. Increase the profits of domestic steel enterprises. The appreciation of the RMB exchange rate against the US dollar has reduced the import costs of iron ore, scrap steel, coking coal, oil and gas, billet and so on. At the same time, steel prices remain relatively high, which will enable steel enterprises to achieve more profit increases.
5. Favorite A-share steel plate. Domestic iron and steel enterprises to achieve profits beyond the expected growth, the natural formation of a solid foundation for higher dividends. And the increase in dividend yield, and the trend is good, and will attract social funds sought after, including the north of the capital, which is good for A-share steel plate.
6. Further widening the gap between domestic and foreign steel prices. At the present stage, the international steel market is tight and the price of the international steel market is far higher than the domestic level. An appreciation of the yuan against the dollar, which spurs iron imports and curbs exports, will widen the already existing gap between domestic and foreign steel prices.
Source: Chen Kexin, chief analyst at Lange Iron & Steel Economic Research Center
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Post time: 03-06-21