Futures Trading In China Jumbles Global Steel Market

21 June 2016

Speculative trading in China's futures market has caused wild swings in prices for some steel products, affecting other countries since higher prices lead to increased production in a country with an overcapacity problem.

The spot market is being roiled by trading of steel-derived commodities such as rebar and hot-rolled coil listed on the Shanghai Futures Exchange as well as iron ore and coal contracts traded on the Dalian Commodity Exchange.

China produced over 800 million tons of crude steel in 2015. This figure accounted for nearly half of global output despite being the country's first decrease in 34 years. And China's steel exports in 2015 topped 100 million tons for the first time.

Against such a backdrop, futures trading for iron ore in Dalian jumped to 500 million tons a day in March. In Shanghai, trading of rebar reached about 120 million tons a day in April -- larger than Japan's annual crude steel output.

Economic stimulus by China's government encouraged the rise of prices this year. While Chinese hedge funds rattle the nonferrous metal market, institutional investors such as investment trusts appear to have increased buying of steel-related futures contracts, said Naomi Suzuki, a senior analyst at Sumitomo Corp. Global Research. The price rally is not driven by real demand.

The most actively traded May contracts for iron ore in Dalian surged beyond 570 yuan ($86.58) per ton, double a low booked in December. Rebar in Shanghai reached 2,900 yuan a ton in April, soaring some 80% from a low in December.

But at the end of April, the exchanges slammed the brakes on the overheating markets by raising commission fees and margin requirements, as well as restricting trading by some investors. The market chilled, with iron ore now trading around 370 yuan in Dalian and rebar going for around 2,000 yuan in Shanghai, with decreased turnovers.

The Chinese government led by President Xi Jinping seeks to spur consumption through asset appreciation, but a "virtual speculative economy" that does not reflect reality is unsustainable, said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. Premature market management is letting speculators switch from one target to another, leading to a repetitive cycle of overheating and collapse, he said.

Speculative trading of iron ore surged after the Shanghai stock bubble burst last year, and such trading of real estate -- ongoing since last year -- will reach a turning point soon, he predicts.

What troubles steelmakers in Japan and elsewhere is that China's steel production and exports are influenced by such trading and its rebound effect. Steel spot prices have recovered sharply since the start of the year, driven by the futures market. Steel mills that shut down have come back online.


Source : asia.nikkei.com