SINGAPORE, June 21 -- Commodity markets are likely to rise on Monday after China vowed to make its currency more flexible, but traders added the move would probably support raw material and grain prices more than energy.
Although China made clear on Saturday that a one-off step change in its exchange rate similar to 2005 was not on the cards, analysts expect the yuan to rise slowly, adding to its nearly 20 percent gain since its last revaluation in 2005.
Analysts have talked about a rise in the order of 5-10 percent in the yuan over the year, effectively making imported raw materials less expensive for Chinese buyers.
"This will tempt speculators back into the market on the long side. Most of our markets are highly geared to Chinese demand and anything that encourages Chinese buying will be positive," a trader in Singapore said.
"Look for the biggest reaction in markets like base metals and iron ore where China is the dominant consumer and heavily reliant on imports. In a market like oil, I don't think we will see as great a response."
He noted the weakness in base metals -- copper prices have fallen by a fifth since mid-April-- may be seen as an opportunity too good to pass up.
"This creates additional arbitrage opportunities and generally lifts the upside risk outlook. We could be good for a 2-3 percent pop early next week," he added.
Benchmark London Metal Exchange copper CMCU3 closed at $6,435 a tonne on Friday, down $11 on the day and well off the mid-April just above $8,000, undermined by worries about the euro zone debt crisis and slowing growth rates in China.
Major Chilean copper miner Antofagasta Minerals (ANTO.L: Quote) also saw a stronger yuan helping boost demand of the metal in China.
Fred Demler, head of commodities for MF Global, said: "Should be a positive, as it was in prior years."
When China raised its exchange rate in 2005, by 2.1 percent, commodities rallied for more than a year after the revaluation, although not solely because of Beijing's move.
Last year, China spent around 607 billion yuan ($89 billion) on importing oil, 343 billion yuan ($50 billion) on iron ore and 206 billion yuan ($30 billion) on copper.
SAVINGS ON COMMODITY PURCHASES
An increase of 3 percent in the yuan would have saved the nation some 56 billion yuan ($8.21 billion) on its commodity purchases, or enough to buy more than 1 million tonnes of copper.
In grain markets, soybean prices may rally - China buys around half of the soy sold on the international market. Chicago Board of Trade November soy SX0, which has replaced July as the lead contract, ended Friday 5-½ cents higher at $9.30-½ per bushel after reaching $9.35, its highest level in a month.
Traders said the yuan move would add to positive sentiment the market is currently seeing from U.S. weather worries and confirmation that exporters sold 120,000 tonnes of U.S. soybeans to an unknown destination for 2010/11 delivery.
Traders speculated the sale could be earmarked for China.
Other markets were also expected to see support, but the nation, the world's second biggest oil consumer, only buys 1 in 10 of the world's barrels of crude, as against more than 40 percent of global copper supply.
In addition, the scope of gains for oil prices might be limited because of Chinese price controls of fuel and the nation's status as an exporter of oil products, which may be undermined by a stronger yuan.