As discussed in the previous part, China has allowed its currency, the yuan, to depreciate. Most of China’s trading partners, including the US, have long alleged that the yuan is undervalued and does not reflect the true market fundamentals. China not only has prevented the yuan from appreciating, but has now let the currency depreciate against the US dollar, as can be seen in the chart below.
Implications for Alcoa
A falling yuan would make China’s aluminum exports more competitive globally. Aluminum producers including Alcoa (AA) have been complaining about the surge in Chinese aluminum exports for quite some time now. According to Alcoa, Chinese companies export “fake-semis” to take advantage of China’s tax regime, which encourages the export of value-added aluminum products.
China has a prohibitive 15% tax for the export of primary aluminum products. However, aluminum producers allege that Chinese companies are disguising primary aluminum as semifinished aluminum to evade the export taxes.
In the coming parts of this series, we’ll explore the recent trend in Chinese aluminum exports.
Implications for mining giants
For global mining companies including Rio Tinto (RIO) and BHP Billiton (BHP), a falling yuan would negatively impact their dollar revenues. These companies would likely be impacted by negative currency translations in 3Q15. Please note that China is the largest market for both RIO and BHP.
However, a stronger US dollar (UUP) would actually benefit Alcoa. While Alcoa gets more than half of its revenues from US markets, most of its production facilities are located outside the United States (VTI).
Meanwhile, a falling yuan would also increase the unit production costs for some of the Chinese aluminum producers. We’ll discuss this in detail in the next part.