China Commodity Crash Accelerates As Traders "Forced To Destock"

"Iron ore doesn't have good fundamentals," warns one analyst as while the crackdown on leverage in Chinese capital markets (which has tightened liquidity everywhere) is the immediate catalyst, "supply-side pressure is huge as ever, and mills are still seeking to draw down inventories."

As Bloomberg reports, iron ore futures are under pressure again in Asia -- signaling a possible return to the $50s for the benchmark spot price -- as concern builds about the outlook for rising supply and China’s clampdown on leverage ripples through markets, possibly triggering forced sales. The most-active contract in Dalian lost as much as 1.8 percent, while the SGX AsiaClear futures in Singapore fell 0.9 percent to $59.30 a metric ton. After a five-day losing run, the spot price for 62 percent content is at $60.15 a dry ton, the lowest since October, according to Metal Bulletin Ltd. The commodity has sunk on concern mine supplies will go on rising just as China’s mills enter a weaker period for demand and policy makers in Asia’s top economy rein in leverage. Stockpiles at mainland ports are near a record after robust shipments from Australia and Brazil, with miner BHP Billiton Ltd. citing the inventories as among risk factors that may tug prices lower. Citigroup Inc. has said there may have been forced sales by some traders in China.

Of course, it's not just Iron Ore that is suffering. The last two months have been a bloodbath for industrial metals...


As Citi warned over the weekend, "We suspect that a good number of physical traders that are financially leveraged up to five times have been forced to destock due to rising short-term borrowing costs and the recent sharp price corrections."

Citigroup isn’t alone in saying that some traders may be compelled to sell holdings into a falling market as China tightens. Shanghai Cifco Futures Co. said this week signs are emerging that traders are dumping their holdings.