China acts to cool frenzied speculation in commodities

BEIJING • China has moved to clamp down on excessive speculation in commodities after weeks of frenzied trading boosted prices and ignited fears of another bubble in its domestic markets.

Iron ore and steel futures in China fell back again yesterday after the authorities raised transaction costs to cool rapid gains that had raised concerns that an unstable speculative bubble was forming.

However, other commodity futures, including coking coal, kept surging.

Activity on China's largest commodity exchanges has surged in recent days with turnover in key steel contracts exceeding the combined volume of the Shanghai and Shenzhen stock exchanges one day last week, according to a report in The Financial Times. Investors around the world zeroed in on the latest binge as prices of many commodities rose sharply.

The intervention by the exchanges helped to stall the rally in steel and iron ore futures, which had led the surge.

China's top commodity exchanges in Dalian, Shanghai and Zhengzhou have increased trading margins and fees in response to surges in prices and volumes last week that were not matched by an improvement in the fundamentals for most of the underlying commodities.

The most traded September iron ore contract on the Dalian exchange was down 4.6 per cent at 457 yuan (S$95.12) a tonne by midday yesterday, having dipped as low as 453.50 yuan. It hit 502 yuan on Monday, its strongest since August 2014, Reuters reported.

Analysts say the spike is largely due to speculators betting that a rise in infrastructure spending in China will lift raw material prices, which have been battered for years by a broad-based glut.

But analysts say the rise could flip into a precipitous fall. "The speculation-driven futures rallies are not sustainable, and consolidation may have some spillover effects on the spot market," Argonaut Securities Helen Lau said in a note.

On the Shanghai Futures Exchange, rebar-reinforced steel, used in construction, fell 2 per cent to 2,602 yuan a tonne. But coking coal on the Dalian exchange surged more than 5 per cent to 837.50 yuan a tonne yesterday, and cotton on the Zhengzhou exchange rose as much as 3.6 per cent.

Some traders are concerned that higher trading costs could lead to a rapid unwinding of speculative positions and set off a new drop in commodities. Analysts at OCBC Bank said increased lending had benefited commodity-intensive industries.

Still, the amount of trading in steel derivatives showed that speculative forces are a powerful influence on prices that investors have to watch. The risks for the correction of commodity prices could not be ruled out, the analysts said.

A version of this article appeared in the print edition of The Straits Times on April 27, 2016, with the headline 'China acts to cool frenzied speculation in commodities'. Print Edition | Subscribe