Editor's Focus--A New Consideration

During this time, traders have not had to pay detailed attention to one of the trickiest aspects of international trade: currency valuations. While Chinese buyers and international sellers may have had to gauge the currency strength of the euro or the Japanese yen against China’s yuan (also known as the renminbi), the yuan had been fixed to trade at roughly 12.08 percent of the U.S. dollar’s value.

That fixed peg, which had been in place since 1996, was cancelled abruptly in late July, though the new system adopted by Chinese leaders is far from free-floating. But the announcement by the People’s Bank of China was accompanied by a slight increase in the yuan’s value and a pledge to "move into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies."

Fluctuations will apparently be carefully managed by the People’s Bank of China, which says, "The daily trading price of the U.S. dollar against the renminbi in the inter-bank foreign exchange market will continue to be allowed to float within a band of 0.3 percent around the central parity published by the People’s Bank of China."

Western bankers regard the announcement as the start of a gradual process, and it will affect recyclers and their consuming customers as much as anyone. During the fixed-peg era, secondary commodities were among the few U.S. products filling up shipping containers on their voyage back to China. A stronger Chinese currency may further increase the desirability of U.S. scrap to Chinese consumers.

The minor currency adjustments announced in July will not likely cut into China’s overall advantage created by its lower labor costs, so it is questionable to what extent the move has the ability to slow down the growth of industrial production in China.

History is full of cases where unintended consequences made some parties regret receiving what they asked for. U.S. consumers of scrap materials could come to regret a floating Chinese currency.

If the renminbi gains strength against the U.S. dollar, Chinese scrap buyers in the near-term could continue to compete for material in the United States with a currency that will get them more for their money.

In the long run, domestic consumers may see operating costs for Chinese competitors rise, but not before an increased Chinese presence in the U.S. scrap markets pushes scrap prices up for everyone.