Another Chinese Speculative Buying Frenzy In Commodities Collapses

Fool me once, shame on you; Fool me twice, I must be a Chinese commodity speculator. In a disastrous case of deja vu all over again, commodities from copper to iron ore and from rebar to coking coal have exploded higher in the past few weeks... just like they did in April/May of this year. And, as Reuters reports, just like we saw in May, the spike in volume relative to open interest has prompted exchanges to crackdown on the rampant speculation, increasing transaction fees and margins fuelling a "panic among investors," as they rush to sell.

As a reminder, this is what happened in April/May...

 

And this is what government-intervention-driven malinvestment-creating unintended consequences looked like...

*  *  *

As Reuters reports, a sharp, broad fall in Chinese commodities "suggests that the crazy jump last week cannot be sustained and so we're seeing self correction," said Wang Di, analyst at CRU consultancy.

Iron ore on the Dalian Commodity Exchange, which rose as high as its exchange-set ceiling in the previous four trading sessions, has fallen 14% in the last 2 trading days.

Rebar steel also slid 14 percent and coking coal is down 12%.

But it's different this time, right?

And finally Copper...

A flurry of measures from Chinese commodity exchanges from Dalian to Zhengzhou and Shanghai over the past week including increased transaction fees and margins has fuelled a "panic among investors," said analyst Wang Fei at Huaan Futures.

"With a cap on trading limit, big institutional investors started the sell-off, which was followed by smaller retail investors," said Wang.

 

The latest curbs reduced market liquidity, accelerating the price falls, said a Shanghai-based analyst who declined to be named because he was not authorised to speak with media.

 

"Hot money from the stock market and programmed trading entered the futures market at the height of the rally. These investors are not familiar with China's futures market. They are the major force in the selloff today and on Friday," he said.

Chinese commodity exchanges and regulators took similar steps earlier this year to stamp out speculative trading that was also behind the boom and bust cycle in its stock markets last year.