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China tries to tame animal spirits in commodity markets & News

2017-06-05 02:35 [MARKETS] Source:Netword
Guide:Nearly 240 million tonnes of steel rebar traded on the Shanghai Futures Exchange (ShFE) last Thursday.

Labors work on a pile of iron ore at a steel factory in Tangshan in China's Hebei Province November 3, 2015. Picture taken November 3, 2015.

Labors work on a pile of iron ore at a steel factory in Tangshan in China's Hebei Province November 3, 2015. Picture taken November 3, 2015.

By Andy Home | LONDON

LONDON Nearly 240 million tonnes of steel rebar traded on the Shanghai Futures Exchange (ShFE) last Thursday.

That was equivalent to around a third of China's steel production last year, not just of construction-destined rebar but of every imaginable type of steel product.

And if that sounds like a lot of steel, consider the fact that on March 10 this year trading volumes on the Dalian Exchange iron ore contract exceeded one billion tonnes, more than the combined annual output of Rio Tinto, BHP Billiton and MARKETS/201706/03218.html">Brazil's Vale.

OK. So there's an element of double-counting at work here since Chinese exchanges tend to include both sides of a trade in their volume figures.

But there's no disguising the surge in speculative interest that has been sweeping across the spectrum of Chinese commodity contracts, from iron ore to corn to polypropylene.

The flood of money has propelled prices of commodities such as iron ore and steel rebar sharply higher.

Now, however, the authorities have moved to tame the animal spirits firing up Chinese markets with a series of measures such as raising margin requirements, hiking transaction fees and widening daily limits.

They seem to have done the immediate trick with volumes and prices losing some of their froth this week.

But there is a sense that Chinese investors, having once tasted the profitable elixir of trading commodities, are not going to be beaten back for long.

We may be witnessing the start of a whole New chapter in the long-running, stormy story of speculators versus real-world commodity supply chains.

Graphic on Dalian iron ore trading:

Graphic on Shanghai steel rebar trading:

Graphic on Shanghai aluminum trading:


Gold has always been the investment of choice for retail money, both in the West and in China.

But in China speculative interest has been building for a while in markets that in the West have largely been shunned by the man in the street.

In January last year London copper slumped 11 percent in the space of two days after a concerted bear attack by Chinese funds on the ShFE contract.

It was the first time the London Metal Exchange, where activity is almost exclusively conducted by big industrial and Financial players, found itself at the mercy of another market-place.

And those Chinese bears returned to attack copper on the short side in both July and November.

Western traders woke up to the existence of powerful Chinese hedge funds such as the exotically-named Shanghai Chaos.

And in November it wasn't just copper that got hit. There were crowd selling surges in metals such as aluminum and lead, both of which had largely traded below the radar of most local investors.

The key change appears to have been the Chinese authorities' clamp down on Stocks trading last year in reaction to excessive volatility.

Chinese retail investors simply switched their focus to the commodities sector, laying the foundations for this year's remarkable explosion in trading activity.

The measures taken to cool overheating markets reveal much about this New type of investor, one who trades on margin (now hiked across the board) and one who is in and out in the space of a day (no more commission discounts for Dalian iron ore day-traders).


One of the reasons why the Chinese authorities are moving to try and tame run-away markets is because excessive speculation in commodities can quickly feed through into real-world consequences.

The bear attacks on industrial metals last November caused massive consternation among China's own producers, who appealed for government help in the face of "malicious short-selling".

There was frantic talk of concerted production cutbacks, emergency stock-piling and direct government assistance. With hindsight much of it amounted to price-signaling, a warning to short-sellers to back off, although in copper there was concrete government action in the form of purchases from the State Reserves Bureau.

This time around with investment surging on the long side, the real-world impact has been even more far-reaching.

There's no doubt that Chinese players understood early the likely effects on the entire ferrous supply chain of reNewed government stimulus in the form of credit expansion and infrastructure build.

Prices of physical commodities were always going to react higher but the scale and the speed of the price rallies have been unprecedented.


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