From Coal To Eggs, China Commodities SellOff Deepens As Rally Turns To Slide

6 May 2016

Chinese commodity futures from coal to eggs extended falls on Friday as speculators pulled more money out of markets whose sharp surge two weeks ago unnerved global investors and forced regulators to step in and restore calm.

Commodities linked to China's steel sector, which led the mid-April rally, were the hardest hit, deepening this week's losses as concerns emerged that demand in the world's biggest steel consumer could soon wane. The selloff spread to agricultural products including soybeans, eggs and cotton.

Renewed worries over China's economic health have also weighed on sentiment, breaking earlier perceptions that the world's second-largest economy had stabilized.

The retreat pulled prices of many of the commodities below levels in mid-April when a buying frenzy, pinned on retail investors, bloated volumes and drew comparison with the boom-and-bust cycle in China's stock markets last year.

"It's panic now and capital is flowing out of commodities markets amid a cautious outlook on the economy," said a trader at a fund in Shanghai.

The price declines suggest that Chinese exchanges have succeeded in popping the bubble, at least for now, after commodity platforms in Dalian, Shanghai and Zhengzhou launched measures to curb speculative buying.

Investors have started to lose faith in Chinese steel demand for May and June, triggering falls for steel and its raw materials, said Fu Yang, an analyst with Guotai Jun'an Futures in Shanghai.

A tighter steel market following shutdowns of Chinese mills in the past year and a seasonal pickup in demand helped spur prices in the past two months. But producers have since ramped up output and once-shut plants have also resumed production.

"The steel mills have started to become cautious towards the market after the really crazy rally. At the same time they don't think demand will be sustainable," said Wang Di, analyst at CRU consultancy in Beijing.

The most-traded rebar - or reinforcing bar used in construction - on the Shanghai Futures Exchange fell as far as 2,281 yuan ($351) a tonne, its weakest since April 11. It was down 1.6 percent at 2,318 yuan by the midday break.

Rebar - where traded volume in the most-active contract last month was enough to build San Francisco's Golden Gate Bridge more than 15,000 times over - had fallen 17 percent from its April peak.

Iron ore on the Dalian Commodity Exchange fell more than 4 percent to 404.50 yuan a tonne, its weakest since April 18.

Other steel raw materials fell more sharply with coking coal down as much as 6.7 percent and coke falling by the 7 percent limit maximum allowed by the Dalian exchange. Nickel, used to make stainless steel, dropped as much as 5.6 percent.

A stronger U.S. dollar was weighing on the commodities market, said Wang Bing, senior broker with Orient Futures in Shanghai.

"Technical indicators showed that short investors are quite strong now," said Wang.

Other losers on Friday in China included eggs, which fell 3.2 percent, soybeans which slid 2.6 percent and cotton that dropped 1.6 percent.


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