We recently received a note from a reader with questions regarding the recent Chinese renminbi currency devaluation and how sourcing professionals ought to engage with their Chinese metals suppliers. The questions included:
- Should I be approaching all of my Chinese suppliers for a 3.5% price reduction?
- Should I expect to get it?
There are several ways to answer that question. So let’s start with the narrow answer and then expand into other aspects of China’s currency announcements.
What will the devalued yuan mean for your metal buying strategy?
The Basics
First, if you pay your Chinese metal suppliers in RMB (yuan) then you ought to expect an automatic price reduction of 3.5% because the currency has depreciated. In other words, when you convert your dollars to RMB, you should see a 3.5% advantage (or whatever the newest/latest currency exchange rate is).
But let’s assume that you buy your Chinese goods in US dollars, as most US buying organizations do. The next question you may need to ask is as follows: Did your Chinese suppliers extract a price increase from you in the last 12-months due to an appreciating currency (as opposed to any other reason)? If yes, then certainly it seems appropriate to request a price adjustment now. If no, then please read on.
Stepping Back
Let’s take a step back and review two more scenarios here. We will discuss each in additional detail:
- Scenario 1: You are buying Chinese goods in euros or Japanese yen or Korean won.
- Scenario 2: You are buying Chinese goods in USD.
In the first scenario, if you are buying metals from China in euros or Japanese yen or Korean won and your prices have increased automatically due to an appreciating RMB, then you will automatically receive a 3.5% price reduction (or whatever the latest currency exchange rate is) based on the new previous day’s spot price market fix—assuming your prices hold steady. In other words, if you are buying on a fixed contract from your Chinese suppliers, you ought to automatically receive a price benefit from the depreciating RMB. And you don’t even need to ask for the price reduction; it will come automatically.
However, if you are in a fixed price contract with a Chinese supplier and pay in US dollars, you will automatically receive a 3.5% price hike. Your basis of negotiation will be weak unless your suppliers have managed to obtain price increases from you this past year because of currency.
In the case you did pay currency associated price increases, by all means, you may wish to negotiate using the previous month’s average or 3-month average Chinese yuan/US dollar exchange rate, but perhaps wait a month or two before you negotiate. You may have a difficult time negotiating a price decrease on a currency exchange rate basis if you did not receive a price hike from your Chinese suppliers as the currency appreciated.