Iron-ore futures in Asia tumbled in the overnight session after China's state planners continued to wage war against soaring commodity prices by threatening top metal firms with severe punishment for price manipulation to excessive speculation to spreading fake news, according to Bloomberg.
After a year-long vertical rampage, iron-ore futures have hit a sudden air pocket in the last week amid chatter from Chinese regulators. There's a "zero tolerance" for monopoly behavior and hoarding, the National Development and Reform Commission (NDRC) told top execs of top metals producers on Sunday.
As a result, China's Dalian Commodity Exchange's most-traded iron-ore contract for September delivery plunged 5.2% to 1,064 yuan ($165.46) per ton on Monday. Dalian iron-ore futures entered a bear market (down more than 20%) since May 12. Iron-ore contracts on the Singapore Exchange tumbled as much as 7.5% to $177.35 per ton.
"With policy risk-shifting toward government intervention, prices will surely be affected by market sentiment," said Li Ye, an analyst at Shenyin Wanguo Futures Co. in Shanghai, who Bloomberg quoted. "The rapid surge in commodity prices has badly affected manufacturers and market orders, leading to losses and defaults."
Chain's attempt to reign in commodity prices comes as the government called price increases for copper, coal, steel, and iron-ore "unreasonable" last week and vowed to curb speculation.
Commodity analyst at Australia and New Zealand Banking Group published a note Monday that read, "China's authorities continue to raise concerns about the rise of commodity prices, raising concerns that they may tighten regulations."
NDRC released a statement that said metal firms should "actively fulfill their social responsibilities" in maintaining market order. "Do not collude with each other to manipulate the prices, fabricate and disseminate price increase information, and do not hoard and drive up prices," it said.
The drive to limit the commodity boom also comes as the price of finished goods departing from factories increased at the fastest pace in more than three years for April. The producer price index climbed 6.8% year-on-year, exceeding economists' expectations and exceeding March's +4.4%.
China's industrial frenzy has stoked demand for commodities such as iron-ore, copper, and many other base metals and have helped push up GSCI's industrial metal index to near-record highs.
Bloomberg data showed that Chinese steel output in April increased to 97.8 tons last week, hitting monthly and daily run-rate records. The surge in production has increased year-to-date production to 375 million tons, or about a 16% jump compared to the same period last year. This also helped to pressure prices last week.
Now policymakers in China have moved to tighten credit conditions and attempt to rein in the steel sector. The more important news is that China appears to be suffering from a growing credit hangover, with its credit impulse turning negative. From peak to negative, it only took seven months this time, compared with 9-10 months in the past.
The slowdown in China's credit should not come as a surprise to readers as we've presented several notes on the turning point since the beginning of the year.
One final reminder: the credit impulse first reaches assets driven primarily by the Chinese economy (Chinese bond yields and industrial metals). Next to be impacted are inflation breakevens and sovereign yields in Western economies. The peak correlation for other growth-sensitive assets such as eurozone banks and AUD/JPY arrives with a bigger lag of around 4-5 quarters. This result, while logical, is quite significant, as it gives us a playbook for the ebb and flow in Chinese credit impulse.