China's decision to continue revaluing its yuan currency is unlikely to stimulate demand for foreign iron ore but could undermine the country's fragile steel export market, traders and analysts said.
China's central bank said at the weekend that it would "proceed further with reform of the yuan exchange rate regime" and ditch a dollar peg it put in place after the global financial crisis hit in the second half of 2008.
Steel product exports declined 58.5 percent in 2009, and traders were concerned that gradual recovery since December last year could be derailed by further currency appreciation, they said.
Exports surged 127 percent to 18 million tonnes in the first five months of 2010, but traders said Chinese steelmakers had already started to struggle.
"Chinese steel exports have had no chance in recent weeks, even though our hot rolled coil on FOB terms is cheaper than that from India or Russia -- a more flexible currency, which means growing appreciation, will have a big impact," said a steel export manager based in Beijing.
But the trader said the move could at least put a stop to recent proposals aimed at reducing tax breaks to steel exporters.
"I don't think China will try a double-strike of export tax rebate cuts and yuan currency revaluation -- the government may slow down its plans."
A 4 trillion yuan ($586 billion) stimulus package shielded the Chinese steel sector from the collapse in foreign markets last year and created a boom in iron ore buying that rescued from the global industry from the doldrums. But after a blistering 18 percent surge in ore imports in the first quarter of 2010, the market slowed in April and May amid fears demand was dwindling and that local steelmakers simply could not afford to pay higher ore costs.
While a stronger yuan will eventually boost China's purchasing power for the key steelmaking ingredient, it is unlikely to have any immediate impact on the market, which has remained stagnant for a month.
"The cost burden could fall slightly, but no one buying iron ore is expecting the margin of revaluation to be particularly large," said Xu Guangjian, an iron ore analyst with the Umetal consultancy in Beijing.
"The deciding factor right now is still the supply-demand situation, particularly downstream demand in the third quarter." (Reporting by David Stanway and Ruby Lian; Editing by Chris Lewis)