Alex Cutulenco | August 13, 2015: China devalued its currency even further on Wednesday to 6.3306 USD/CNY. But what exactly does this mean for the Canadian economy and Canadian businesses? Gravitas Financial analyst Alex Cutulenco explains how the share price of one Canadian wood products company could get shaved by the Asian giant’s latest money move.
In short, the devaluation of the yuan makes imports into China a lot more expensive. Consider this: before, China could buy products costing US$100 for ¥611.62Chinese yuan (using the old yuan exchange rate of 6.1162), but now, these same products costing US$100 will have to be purchased for ¥633.06 (using the new 6.3306 exchange rate). Naturally, this makes all imports into China more expensive for them, which will likely result in less demand for these goods.
The effect on Canadian business is simple: Canada’s exports into China will most likely fall. A look at Canada’s exports into China for 2014 shows:
Source: Trade Data Online. Industry Canada. May 12, 2015. http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home
Source: Trade Data Online. Industry Canada. February 21, 2015. http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home
Canada exports $19 billion worth of goods into China, with wood pulpaccounting for the largest share at 15.15%. That being said, Canadian companies within this sector might be hit by slumping sales in the near future. Specifically, names like West Fraser Timber (TSX: WFT),a Canada-based wood products company, may experience the adverse effects of this devaluation. China accounted for 16% of its sales in 2014. West Fraser Timberproduces lumber (spruce/pine/fir (SPF) and southern yellow pine (SYP), panels (plywood, MDF and LVL), pulp (NBSK and BCTMP), newsprint and wood chips.
Alex Cutulenco is an analyst with Gravitas Financial and can be reached at alex@gravitasfinancial.com
