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Weaker Yuan May Cut Profits at Chinese Steelmakers, Mirae Says

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Dec. 5 (Bloomberg) -- A weaker yuan may spur an outflow of investment from China’s property market, curbing construction demand for steel and further cutting profits at Chinese producers of the alloy, Mirae Assets Securities Co. said.

Twelve-month non-deliverable yuan forwards traded at 6.3845 per dollar, a 0.3 percent discount to the onshore spot rate of 6.3638, indicating a depreciation of the currency in the next 12 months. China’s foreign-exchange reserves fell $60.8 billion to $3.2 trillion in September, the first decline since May 2010, indicating capital outflows, data compiled by Bloomberg show.

“The two sets of data tell us the yuan appreciation trend is likely to stop and reverse,” Hong Kong-based Mirae analysts Shirley Zhao and Henry Liu said in an e-mailed note today. An expected yuan depreciation “and the consequent hot-money outflows will directly reduce steel demand from the Chinese property sector, which has suffered a slowdown.”

Profit margins at 77 large and medium-sized Chinese steelmakers narrowed to a record 0.47 percent in October, according to the Economic Information Daily, citing the China Iron & Steel Association.

Loan limits to curb inflation and home-purchase restrictions to prevent a property bubble had spurred price drops in cities including Beijing and Shanghai. China’s construction industry accounts for 53 percent of the country’s steel demand, Mirae said.

A weakening yuan will also increase raw-material costs for steelmakers, Mirae said. Iron ore accounts for 35 to 45 percent of costs, according to Mirae.

Imports of dollar-denominated iron ore make up 60 percent of China’s consumption, the analysts said.

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net.

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