Weaker Yuan Wallops Commodities as Importers Face Higher Costs

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The devalued yuan is dealing another blow to commodities.

The yuan was set for its biggest two-day drop since 1994 after Chinas 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 percent, 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 youre already in surplus, it just makes them extremely vulnerable, said Dominic Schnider, head of commodities and Asia-Pacific foreign exchange at UBS Group AGs wealth-management unit in Hong Kong. Growth concerns will continue to weigh on the market.

The Bloomberg Commodity Index is resuming declines after its biggest gain since February on Monday amid increased Chinese crude imports, supply disruptions at copper mines and worsening crop conditions for corn.

Oil Falls

Brent crude, the benchmark for more than half the worlds oil, dropped 0.7 percent to $48.85 a barrel in London by 12:02 p.m. Singapore time. West Texas Intermediate futures, the U.S. marker, was down 0.4 percent after closing at the lowest level in more than six years on Tuesday.

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

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

Chinas move on the yuan adds momentum to the dollar, which strengthened this year as the Federal Reserve gets closer to raising U.S. 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.