China’s Steel, Iron-Ore Prices Beaten Down as Speculators Panic
17 November 2016
China’s steel-related commodities tumbled again Wednesday, led by steep declines in iron-ore futures, as a flurry of tighter trading rules and worries about increased regulatory scrutiny extended a selloff.
On Friday, the Shanghai, Dalian and Zhengzhou commodity exchanges raised transaction fees and margin requirements for a wide range of contracts, including thermal coal, iron ore and rubber. The three exchanges have also taken restrictive measures on more than a dozen clients since Monday for violating trading rules.
Fears over the heightened regulatory supervision have prompted panic selling in several commodities, including steel rebar and copper, since Monday overnight trade after a frenzied rally that sent prices of some steel-related products surging more than 50% since the beginning of October.
On the Dalian Commodity Exchange, the most actively traded iron-ore futures slumped 6.5% to 577 yuan ($84.19) a metric ton Wednesday, following a 6% drop Tuesday after it hit a two-year high Monday. Coking-coal futures reversed a 4.8% intraday loss to close up 0.4% at 1,569 yuan a ton, while coke futures dropped 1% to 2,057 yuan a ton.
In Shanghai, benchmark steel-rebar futures dropped 3.9% to 2,816 yuan a ton after falling as much as 6%, while hot-rolled-coil futures fell 3.6% to 3,205 yuan a ton.
“Stricter regulatory rules have caused some level of panic selling and curbed risk appetite among traders,” said Zhou Tao, an analyst at Citic Futures. “Coke and coking-coal prices have particularly been under regulatory pressure.”
However, analysts say a shortfall in coke supply, amid low inventory at steel mills and sustained infrastructure spending by the government, provides fundamental support for the rally.
On Friday, the Shanghai Futures Exchange banned investors in steel rebar from opening intraday positions of more than 10,000 lots, while the commodity exchange in Dalian raised transaction fees and margin requirements for coke and iron ore and limited intraday open positions for coke and coking coal to fewer than 1,000 lots.
Analysts say that since a three-day rally in iron-ore futures last week, short sellers—or investors betting on price declines—have lowered their positions to avoid a margin call, which would require them to put up more money to cover their debts.
Measures to rein in the property market and tepid trading in equities have lured speculative funds to seek quick yields elsewhere, driving up futures prices of commodities ranging from iron ore to soybean meal.
“The rally in coke prices sparked this round of speculative frenzy, primarily due to sharply lower output as a result of supply-side reform policy,” said Zhang Pin, researcher at Chinatsi.com, which monitors steel prices in China.
China’s top economic planner said last week that the country had already met the target of cutting 45 million tons of steel capacity this year.
Ms. Zhang said her firm’s application to co-host a conference on iron ore with a futures company was rejected by the commodity exchange in Dalian this month over fears it would trigger an investment frenzy.
The Dalian Commodity Exchange couldn’t immediately be reached for comment.
Analysts say Beijing is concerned about a swath of cash inflows that may amplify swings on the futures market, and is wary of triggering the sort of panic selling that led to last year’s stock-market crash in China.
Reports Tuesday that a large futures company based in Zhejiang was being investigated unnerved some investors, traders say. The Dalian and Zhengzhou commodity exchanges both denied investigations into any futures firms, according to state-run Shanghai Securities News on Wednesday.
Last week, the China Securities Regulatory Commission warned futures companies to look more closely at the source of funds coming into the market to avoid market risks.