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How Will China’s Devaluation of the Yuan Impact Iron Ore Prices?

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PBOC devalues yuan

The Chinese yuan depreciated by 1.8% on August 11, 2015, as the People’s Bank of China (or PBOC) aimed to boost the depressed economy and push exports. The Chinese yuan is pegged to the US dollar (UUP) and is allowed to fluctuate within a 2% bandwidth, defining its upper and lower limits beyond the reference rate. With competition growing from its peers in Asia, the PBOC decided to increase the tightly controlled peg with the US dollar to 6.2298 per dollar.

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Rationale for devaluation

The dismal trade data out of China, which was released on August 8, was the likely reason for the devaluation move. A weaker currency means that Chinese exports will become cheaper compared with other countries.

Implications for miners

On one hand, the weaker domestic currency can increase the cost of the dollar-denominated commodities such as iron ore, weighing on demand. On the other hand, the weaker yuan can boost export competitiveness, which could help steel exports as well.

One other fallout effect of the yuan’s devaluation could be on the currencies of producer countries like Australia and Brazil. This can help reduce the costs of production for iron ore miners, which would be positive for them. While Rio Tinto (RIO) and BHP Billiton (BLT) (BHP) mainly operate out of Australia, Vale SA (VALE) has most of its operations in Brazil.

Meanwhile, Cliffs Natural Resources (CLF) has the bulk of its operations in the US. Although it is relatively small, the Asia–Pacific segment is engaged in the seaborne trade.

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