Moves in China to cool activity in steel, iron ore and other commodity markets late last week saw prices fall sharply as exchanges took action to try and limit the impact of speculators.
There have been reports that Chinese hedge funds and other speculators have started playing in the steel and iron ore markets thanks to the surge of bank lending in the first quarter of this year and the rebound in activity (and prices) in China’s housing markets.
Yesterday Morgan Stanley said in a note yesterday that “Now China’s speculators engage commodities…China’s latest speculative spike has stunned global markets,” according to Bloomberg.
Bloomberg has likened the activity to what happened in the Chinese stockmarket last May – August when a speculative surge saw a bubble form, and then a bust as the government struggled to contain and control the situation.
And US ratings group, Fitch warned the boom in Chinese steel prices isn’t sustainable. The firm said in a note yesterday that the gains in steel prices have been driven by a seasonal recovery in activity that’s been exacerbated by increased speculation in the futures market.
That surge in futures trading saw moves late last week from the Shanghai Futures Exchange (which increased transaction fees) while the Dalian Commodity Exchange raised iron ore margin futures requirements, forcing traders to put up more money.
"Due to a volatile domestic and international economic and financial situation, there are many uncertainties affecting market operations. We are seeing brisk transactions and increased price fluctuations. Investors should be reminded to carefully assess market information and invest rationally."
The Dalian exchange also tightened rules on what it called abnormal trading, which now includes frequent submission and withdrawal of orders and self-trading.
Back in March, the Dalian exchange cut fee discounts and tightened trading rules for iron ore after futures prices leap 19% in one day.
The Zhengzhou Commodity Exchange urged prudent investment on cotton futures amid "relatively large price fluctuations."
The moves by the exchanges saw steel and iron ore futures fall on Friday. But steel prices rose by just under 1% on Monday, while iron ore futures eased.
Contracts for steel reinforcing bars (or rebar, the key steel product traded in China) lost 4.8% to 2,619 yuan a tonne,the largest daily decline in six weeks.
And according to the Metal Bulletin iron ore with 62% iron oxide percent content delivered to Qingdao fell 5.9% to $US66.33 on Friday, more than halving Thursday’s 8.8% jump.
On Monday the Metal Bulletin reported the iron ore spot price eased 0.4% to $66.07 a dry tonne.
Those falls trimmed iron ore’s price rose since hitting a low $US38.30 in late December, to just under 73%.
“Volatility and trading volume jumped as the economic and financial situation at home and abroad led to uncertainty and complexity,” the Shanghai Futures Exchange said in statement Thursday, advising brokers to watch for risks and reminding “investors to cautiously judge the market and rationally invest.”
But rebar futures volume for October delivery was still at near record levels – 21.9 million contracts on Friday, just under the 22.4 million contracts on Thursday.
Market price for construction rebar fell almost 55 last week, according to Bloomberg data, ending a four day surge that had saw prices gain nearly 15%, the biggest weekly rise since the contract started seven years ago.
Prices of other steel products, such as hot rolled coal also fee on Friday in the wake of the exchange’s tough talking. Rebar futures prices are up 47% so far this year.
And Bloomberg pointed out that physical rebar prices have risen 57 % so far this year in China because steel production has fallen short, triggering fears of a shortage just as the property market is being boosted by government stimulus spending.
In a report on Friday, Goldman Sachs analysts said that while the rally in Chinese rebar was “leading the charge” in a commodities rebound, the bank didn’t see a sustainable shift in raw-material fundamentals until the third quarter.
The “tight steel market in China is a temporary distraction” for iron ore, the bank said. “The current rally is unsustainable,” Goldman declared
Bloomberg reported “Officials cracked down on speculators using borrowed money to buy equities after a surge in debt exacerbated the boom-to-bust of the world’s second-largest stock market.
"When China was spurring lenders to pump credit to aid growth in 2008 and 2009, investors speculated on everything from Pu’er tea to garlic. Easy money is again surging, with new credit topping $1 trillion in the first quarter,” Bloomberg reported.
