China Loading Up On Depressed Commodities

While the demand for commodities in China without a doubt has been weak, that doesn't mean China isn't a buyer in this market, because it is.

What must be understood is the demand now isn't domestic or for exports, but from the fact the prices have fallen so much, China, as it has done historically, is buying up the resources at bargain prices.

When measured by customs data, there are at least 21 commodities China has increased imports in by over 20 percent in July, according to Reuters.

Agricultural imports were especially strong, "with wheat up 158 percent, barley by 67.9 percent, corn by 1,184 percent, cassava by 28.5 percent, rice by 78.2 percent, soy oil by 25.8 percent, palm oil by 53.3 percent, natural rubber by 70.1 percent and sugar by 72.7 percent."

Crude oil imports jumped 29.3 percent in July.

Metals were also strongly represented. Molybdenum imports climbed 139.8 percent; uranium was up 227 percent; zinc ores up 84.5 percent, and silver up 63.3 percent, among others.

Among major commodities, copper ore and concentrates increased 7.2 percent, and iron ore imports were up a modest 4.4 percent.

What was also interesting in this was China's decision to increase imports at a time its currency was extremely weak. While low prices were definitely a part of the impetus, a declining yuan also had to play a part. If the currency loses more value, the cost of imports would rise even if commodity prices remained stable.

It looks like China was pressed into acquiring the depressed commodities before its currency weakened further. Or course China knows what its policy is going to be, and it's possibly a nod to further debasing of its currency after it buys the commodities it wants at low prices.

Why Yuan Isn't Ready for Prime Time

There has been a lot of speculation concerning the goal and strategy of China concerning the place of the yuan or renminbi on the world economic stage.

I have no doubt the Chinese have a goal of becoming the leading reserve currency in the world, but if that ends up being a reality, it's going to be many years from now.

The idea that China is attempting to bypass the existing currency market and working to build an alternative to it is actually the exact opposite of what it really wants to do, which is to become a larger player in the current global economy.

For now, the yuan isn't close to being ready to be a currency leader, as China needs to take a number of steps before it's going to be considered a means of paying for major transactions on a global basis.

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Yuan to Continue Upward Move

In what can only be called a dramatic change of direction, the upward move of the Chinese yuan has caught a lot of investors off guard, as their attention, in the currency market has mostly been on the Japanese yen, once it implemented a policy to drive down its value.

Meanwhile, the yuan has moved strongly in the opposite direction, strengthening against the U.S. dollar in a meaningful way since the beginning of 2013.

More on strength of yuan

China Says Fed's Inflating Poses Major Risk to Economic Recovery

The move by the Federal Reserve has many countries fuming, including Germany and china, who are outraged over the consequences that could emerge from the misguided move.

China went so far as to say it could undermine any economic recovery that may come in the future, and the U.S. "should not force others to take medicine for its own disease."

Zhang Tao, director of the international department of People's Bank of China, said, "For emerging countries, capital inflows may lead to significant increase in asset prices and foreign exchange reserves, and many countries are concerned about that.

"Doubtlessly, disordered international capital inflows will make emerging countries very vulnerable. As emerging countries are important for the global economic recovery, that will greatly increase the downward risks in the world economy."

Concerning the revaluation of the renminbi or yuan, Chinese President Hu Jinatao reiterated China's policy of gradually reforming the currency over time.

Citigroup (NYSE:C): Asian Emerging Markets Buying US Dollar

The weak US dollar is wreaking as Citigroup (NYSE:C) notes, Asian countries like Indonesia, Philippines, Taiwan, Thailand, Malaysia and Singapore have been snapping up US dollars as a move against their major competitor China.

Increasing strength of the currencies of the smaller emerging markets has been squeezing margins and profits of companies in the region, as the pegged Chinese currency moves in step with the greenback.

The acquisition of US dollars is a defensive step by these countries in order to maintain competitive exchange rates to compete with their exports.

Although financial media has focused on this recently, it has in fact been going on for quiet some time.

China Looking at Switching from U.S. Dollar Benchmark

China and other BRIC nations (Brazil, Russia, India) have been talking some time about the idea of switching from the U.S. dollar as a benchmark to some other currency arrangement.

One of those possibilities has been to move to a basket of currencies as a benchmark as the measure of an exchange rate for the renminbi, or yuan.

Deputy Gov. Hu Xiaolian of China's central bank said this on their government Web site earlier today.

Hu said, "Compared with pegging to a single currency, the exchange-rate regime with reference to a basket of currencies will help adjust exports and imports, current account, and balance of payment in a more effective manner.

"A floating exchange rate has impact on total imports and exports of an economy. Therefore, the floating cannot be aimed to adjust [only the] bilateral trade balance, and it is not advisable to just look at the [dollar-renminbi] exchange rate.

Will Floating Yuan Help Alcoa's (NYSE:AA) Performance?

Alcoa (NYSE:AA) has probably done about as much as they can in cutting costs and preparing for a turnaround when it comes.

Over the last couple of years, aluminum prices have plunged by about 60 percent, and the shares have dropped to just below $11 a share, from the $30 range.

For better cost controls to compete in that regard, Alcoa is developing a bauxite mine in Brazil. They're spending about $1.5 billion on that project. Some of Alcoa's smaller competitors have been nipping away at their business with better prices, contributing to the overall poor performance of the company, the reason for the bauxite strategy.

Other projects are a large aluminum mining project in Saudi Arabia, and a effort to modernize Russian plants to better serve the domestic market there.

Recently they acquired window and door manufacturer Traco, to diversify their product line.

What could help them the most, is the recent decision by China to allow the yuan or renminbi float more against the U.S. dollar. That could generate more demand from China, although they've been cutting back in some areas to battle rising property prices in urban areas and a possible bubble.

The other problem with the renminbi is it is a potential double-edge sword, which could perform reverse and cause more challenges for Alcoa if that is the case.

If it performs as expected, it could be a good boost for Alcoa in the short term.

The bottom line though is still demand and aluminum prices. Until those elements in the equation change, Alcoa is going to continue struggle, along with its shareholders.

Alcoa (NYSE:AA), Century (Nasdaq:CENX) Increase on Yuan Floating Against U.S. Dollar

The announcement by China that they'll float the yuan against the U.S. dollar has caused shares in in Alcoa (NYSE:AA) and Century Aluminum Co. (Nasdaq:CENX), among other commodity companies, to surge today, based on the assumption the yuan will appreciate as a result.

This would of course help commodities which are traded in U.S. dollars.

With China by far the largest importer of a larger number of commodities, it would be beneficial for many companies, which would have their margins and earnings increase as a result.

The other side of the equation which no one is talking about today because of the temporary euphoria, is the consequences to these same companies if the yuan depreciates in value against the U.S. dollar, which would have the opposite effect.

The market believes this won't be the case, and until proven otherwise, in the near-term should help metals producers in general.

Alcoa was at $11.88 a share, a gain of $0.77, or 6.93 percent, as of 1:45 PM EDT, while Century Aluminum rose to $10.86, a gain of $0.82, or 8.17 percent, as of 1:45 PM EDT.

Marc Faber: China Won't Appreciate Currency Against U.S. Dollar

Marc Faber said at the Asian Investor Fifth Annual Asian Investment Summit in Hong Kong today that China is highly unlikely to remove the peg it has with the U.S. dollar, as the European sovereign debt crisis has knocked the euro down hard and fast.

Faber said, “If I had to take a bet, I’d say that the renminbi will not go up this year.”

The renminbi, or yuan, has appreciated against the euro by 16 percent so far in 2010, and exporters from China are starting to get nervous because of the rising costs of doing business as a result.

Faber also said he believes China should have eased up more than they did. Since July 2008, the renminbi has been pegged at an exchange rate of 6.83 percent against the US dollar.