Revalued Yuan Could Hurt Steel Exports

China's revaluation of its yuan currency could undermine the country's fragile steel export market, analysts say.

A statement during the weekend from China's central bank indicated the bank would proceed with reform of the “yuan exchange rate regime," and abandon a dollar peg that was placed after the global financial crisis hit in the second half of 2008.

Steel exports from China fell 58.5 percent in 2009, and traders have expressed concern that the gradual recovery that began last December could be derailed by further currency appreciation.

Exports overall from China have surged 127 percent to 18 million tons in the first five months of this year, but traders say Chinese steelmakers are already struggling.

A US$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 buoyed the global industry. Iron ore imports into China rose 18 percent in the first quarter of this year before the market slowed in April and May amid fears demand was dwindling and Chinese steelmakers could not afford to pay higher ore costs.

While a stronger yuan will eventually boost China's purchasing power for iron ore, it won’t like have any immediate impact on the market, which has been stagnant for the past month.