During the last week we have highlighted the frightening similarity between the speculative spike in China commodity trading (which has sent industrial metals prices soaring in yet another 'error' signal for real supply and demand) and the pump-n-dump in Chinese stocks. Specifically, as Goldman warns the factor that "concerns us the most is the increased speculation in the Chinese iron ore futures market," and now, as Bloomberg reports, it appears that bubble is bursting as Steel and Iron Ore prices tumble most in 21 months after Chinese exchanges raise margins in an attempt to curb speculation.
This is what the commodity insanity looked like!!
Goldman Sachs has expressed its concern about the surge in speculative trading in iron ore futures in China, saying that daily volumes are now so large that they sometimes exceed annual imports.
The increase in futures trading in the world’s largest importer was among factors that have lifted prices, according to a report from analysts Matthew Ross and Jie Ma received on Tuesday. Iron ore volumes traded on the Dalian Commodity Exchange are up more than 400 percent from a year ago, they said.
“While increased fixed-asset investment in China, a bring-forward of steel production (ahead of a government curtailment) and mining disruptions help to explain the strong rally in the iron ore price, the one driver that concerns us the most is the increased speculation in the Chinese iron ore futures market,” they wrote.
As we said ast week, eventually, the excesses will need to be curbed and maybe that starts a new phase of risk-off within China: As one local trader put it:
“The market is moving so quickly, yesterday felt just like the stock market in June last year before the crash... I think how it goes up, that’s how it will come down."
“There have been two days in the past month where futures volumes have been greater than the total amount of iron ore that China actually imported for the whole of 2015 (950 million tons),” the Goldman analysts wrote.
And so, as Bloomberg adds,
To slow trading activity, the Dalian exchange has announced it would be increasing margin requirements and transaction costs on iron ore futures, they said.
nd that has sent commodity prices tumbling...
The most-active Iron ore futures contract dropped as much as 4.4 percent on Tuesday after the exchange doubled trading fees.
The benchmark spot price for ore with 62 percent content delivered to Qingdao fell 5 percent to $62.78 a dry ton on Tuesday, up 44 percent this year, according to Metal Bulletin Ltd.
Other raw materials in China were also in retreat on Tuesday. Coking coal futures, which trade in Dalian, reversed early gains to lose as much as 5 percent to 777.5 yuan ($120) a ton.
As Goldman concluded:"the commodity rally is not sustainable" and along with it the Baltic Dry's misplaced confidence signals.