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China’s steel sector gauges ‘Brexit’ impact

24 Jun 2016 10:46 (+01:00 GMT)
China's steel sector gauges ‘Brexit' impact

Singapore, 24 June (Argus) — Some prices in China's steel complex pushed higher today as market participants largely shrugged off the impact of the UK's vote to leave the EU. The yuan fell and some market participants raised the prospect of lower sales to Europe, but others saw the vote as a chance for China to develop closer trade ties with the UK.

The most active met coke futures contract closed up by 1pc, and coking coal rose by 0.43pc, in line with the physical market, where traders were unconcerned about the vote result.

But iron ore futures fell by 0.65pc, rebar fell by 0.89pc and hot-rolled coil fell by 0.65pc. China's Shanghai stock market fell by 1.3pc.

The official result of the referendum at just after midday in Asia-Pacific showed the campaign for the UK to leave the EU had won just short of 52pc of the vote.

The yuan fell by 0.4pc to 6.61 to the dollar, which indirectly affected physical markets. Wild fluctuations made it difficult to calculate a new exchange rate for export offers, said a Hebei-based mill official who had previously used a rate of 6:55:1.

Chinese exporters see the prospect of weaker sales to Europe after Brexit, and a stronger dollar weighing on commodity prices.

"China's exports to the EU will definitely decrease with its weaker economy and pressure from the dollar," a Shanxi province-based steel exporter said.

"The Brexit will cause political instability and the eurozone's economic retreat," a Hong Kong-based iron ore trader said. "At the same time, capital flows will go to the safest places like the US from emerging economies, and the outflows will lead to falling stock markets."

An Australian mining firm official was more negative. "Though there is no direct impact for iron ore, this will be a shock for the Chinese economy. If other countries in EU take action to leave, then the EU economy will face a collapse situation."

Others see an upside from the vote if it weakens the yuan and leads the UK to seek closer ties with China.

"So far I do not see any positive direct influence, but the yuan weakens. It is a good ‘change' for China's economy," a Xiamen-based iron ore trader said.

China's steel exports may gain market share from the UK if Europe retaliates with high import tariffs.

"We anticipate steel prices into Europe will go up. Customs will not be friendly," a UK steel market participant said. "The industry is very exposed because around 75pc of UK steel output sells into Europe."

"We believe that the UK's decision to leave Europe will give it more trade freedom, and for China it will be a major positive, rather than a negative," Kyushu Global Securities chief economist Deng Haiqing said. Brexit will "unshackle" the UK from the EU's inefficient decision-making process and force Europe to compete with the UK in developing trade with China, he said. "For China, this is likely another ‘strategic opportunity'."

Bids and offers were limited in feedstock physical trade, but that is not uncommon on a Friday.