Devalued yuan deals a blow to already weak oil, commodity prices

A customer holds a 100 Yuan note at a market in Beijing, on Aug 12, 2015.
A customer holds a 100 Yuan note at a market in Beijing, on Aug 12, 2015. PHOTO: REUTERS

NEW YORK (Bloomberg) - The devalued yuan is dealing another blow to commodities.

The yuan was set for its biggest two-day drop since 1994 after China's central bank cut its reference rate for a second time following a record reduction on Tuesday.

Oil and industrial metals fell amid speculation the weaker currency will slow demand by raising the cost of dollar-denominated imports.

The Bloomberg Commodity Index of 22 raw materials dropped as much as 0.6 per cent, declining for a second day.

Investors were already concerned that demand was weakening in China, where the economy is expected to grow this year at the slowest pace since 1990.

While the government seeks to bolster the economy by devaluing the yuan, commodities may end up worse off as imports of metals such as copper slow and exports of raw materials such as steel increase into oversupplied markets.

"China is basically responsible for the bulk of incremental demand and in some of the markets you're already in surplus, it just makes them extremely vulnerable," said Mr Dominic Schnider, the head of commodities and Asia Pacific foreign exchange at UBS Group AG's wealth-management unit in Hong Kong. "Growth concerns will continue to weigh on the market."

Brent crude, the benchmark for more than half the world's oil, dropped 0.7 per cent to US$48.85 a barrel in London by 12:02 pm Singapore time. West Texas Intermediate futures, the US marker, was down 0.4 per cent after closing at the lowest level in more than six years on Tuesday.

Aluminum in London fell 1.7 per cent, while copper decreased 0.8 per cent and nickel slumped 3.7 per cent. Soybeans were 1.1 pe rcent lower in Chicago and corn slipped 0.5 per cent.

Glencore and Fortescue Metals Group led a global slump in mining shares. Glencore, the mining and commodities company led by billionaire Ivan Glasenberg, tumbled as much as 7.7 per cent to a record low in Hong Kong, while iron ore exporter Fortescue fell as much as 9.1 per cent and BHP Billiton slid as much as 4.5 per cent in Sydney trading.

China's move on the yuan adds momentum to the dollar, which strengthened this year as the Federal Reserve gets closer to raising US interest rates. That reduces the investment appeal of gold, which typically offers returns only through price gains, while making industrial metals more expensive for buyers in other currencies.