Staying current: as scrap trading becomes more global, currency exchange rates call for more attention

Recycling Today, Sept, 2004 by Brian Taylor

As campaign issues go, currency valuation is likely to remain in the background in this year's presidential race. Nonetheless, some 87 members of Congress recently Signed and sent a letter to President Bush regarding the perceived under-valuation of the Chinese yuan.

The commodity pricing and flow of scrap that creates the market conditions for scrap recyclers can be affected in many ways by currency exchange rate fluctuations, and the past couple of years have offered several examples.

Demand for American scrap can rise and fall with the value of the dollar (or more accurately, in opposition to it), and even processing equipment shopping decisions can be affected by the value of the dollar, euro and Japanese yen.

YUAN-A BET? Economic policy analysts and formulators have been kept busy in recent years deciding if or when China should cease to peg the value of its currency, the yuan, to the U.S. dollar.

A fair number of American manufacturers would like to see the practice either ended or modified, because they believe American-made goods are being forced to compete unfairly with Chinese-made goods.

"By the deliberate undervaluation of its currency, China skews the prices for its goods in the global marketplace, especially disadvantaging the U.S. producers," says Skip Hartquist, counsel to a group known as the Fair Currency Alliance (FCA).

The FCA consists of the Copper and Brass Fabricators Council Inc., Washington, and the Non-Ferrous Founders Society, Park Ridge, Ill. The membership of the latter group includes many North American-based consumers of copper scrap. They have expressed consistent concern regarding both the escalating price and the perceived scarcity of copper scrap.

When China's fast-growing copper and brass mill, smelter, refinery and foundry segment in China began purchasing more and more North American scrap in 2003, scrap-melting facilities in the United States found themselves paying increased costs for scrap for greater than they could pass on to their customers when they sold their finished product.

In a recent news release, the FCA cited five steps it believes the Chinese government should take to erase some of what the group sees as unfair advantages that Chinese manufacturers enjoy at the expense of manufacturers in other nations. Among those five steps was changing the way the yuan is pegged to the U.S. dollar.

"The pegging of the Chinese currency, the yuan, to a fixed rate of exchange with the U.S. dollar has acted to encourage exports of semi-fabricated mad fabricated products of copper and copper alloys from China to the United States," the group states.

The FCA adds that, "Due to the ongoing fixed rate of exchange, it has been estimated that the Chinese currency is undervalued by approximately 40 percent in relation to the U.S. dollar, which has allowed Chinese producers of downstream copper products to price aggressively in the U.S. market. The result has been massive sales losses by U.S. producers of fabricated copper products and a near crippling of the industry."

The FCA's analysis of the situation goes beyond the pricing factors to point out what it sees as an even wider-spread effect of the yuan-to-dollar pegged currency situation. "As the undervalued yuan has led to huge increases in Chinese exports to the United States, China's reserves of U.S. dollars have ballooned. Some of these large dollar reserves have been funneled to the Chinese copper industry, which has used the hard currency in turn to purchase copper-based scrap in the U.S. market and to outbid U.S. producers for this material. Thus, despite the relative weakness of the yuan (which should have acted to discourage Chinese sourcing of U.S.-dollar-denominated copper scrap), the Chinese government has used various policies to allow its copper producers to source an ever-increasing portion of its raw materials needs from the U.S. copper scrap market. The result for the U.S. industry has been supply shortages and increased costs for this basic raw material."

The FCA has recruited some members of Congress to sign on with its cause, as in mid-August a group of 87 representatives and senators sent a letter to President Bush stating that, "China's deliberately undervalued exchange rate results in extremely low prices on China's exports to the United States, unfairly pressuring domestic firms by undercutting their pricing power."

The letter dosed with a request for action: "We respectfully and strongly urge you to continue to press China for meaningful and expeditious currency reform, especially during the anticipated upcoming visit by the Chinese vice premier later this summer."

Economists are not unanimous in their views of what the Chinese government should do relative to its pegged currency. In early August, an official from Japan's Ministry of Finance reportedly stated that China should revamp its pegging of the yuan at roughly 8.28 yuans to the dollar as a pre-condition to joining the Group of Seven (G7) industrialized nations.