Chinese steel and iron ore futures fell sharply for a third straight day and other commodities also slid on Thursday, giving up more froth after Chinese exchanges slapped curbs to quell speculation that spurred a buying frenzy last month. Mixed signals on China's economic health have also weighed on sentiment, breaking earlier perceptions that the world's second-largest economy had stabilized.
Trading volumes have tapered off from record highs hit in April after China's securities regulator told commodity exchanges in Shanghai, Dalian and Zhengzhou to rein in speculation following rapid price gains in everything from steel to cotton. Volume in the most-traded rebar contract on the Shanghai Futures Exchange dropped to nearly 9 million lots on Thursday from as high as 22 million lots on April 21, when the price also touched a 19-month high. The contract closed down 4.1 percent at 2,309 yuan ($355) a tonne.
Last month, trade in most-active rebar, used in construction, hit a record 1.4 billion tonnes, surpassing China's entire annual steel production capacity. "Prices have gone up so much and there was no support from fundamentals, so we're seeing consolidation," said Helen Lau, an analyst at Argonaut Securities in Hong Kong. A slew of surveys giving mixed signals on the Chinese economy also hit investor sentiment this week.
China's official survey showed manufacturing activity expanding a second month in a row, while a private survey showed it contracted a 14th straight month. Surveys on the services sector pointed to slower expansion. "There is concern whether the recovery is solid or not," said Lau. Iron ore futures were hit hard, with the most-traded contract on the Dalian Commodity Exchange dropping 5.3 percent to 412.50 yuan a tonne. Volume on that contract reached 2.2 million lots on Thursday versus nearly 7 million lots two weeks ago.
Iron ore traded on the Dalian exchange topped 5 billion tonnes last month, enough to make more than 3 billion tonnes of steel. "The wild card ... is the Dalian (Commodity) Exchange where there are huge quantities of iron ore being traded. That is having an impact on people's view of iron ore pricing," Rio Tinto Chief Executive Sam Walsh told reporters after the company's annual general meeting in Australia. Such was April's surge in China's commodity futures that daily trading turnover in 18 contracts averaged $376 billion over the last two weeks, Morgan Stanley said in a report.
Morgan Stanley estimates that the share of retail investors in China's commodity futures market has risen to 50-60 percent in the past two weeks from around 30 percent at the end of 2015. The share of those who trade for hedging has dropped to 30-40 percent from around 60 percent, the investment bank said. "Many futures brokerage firms are reporting large numbers of newly opened accounts belong to retail investors with investable capital of less than 700,000 yuan per account," Morgan Stanley said. Other commodities traded in China also declined, including steelmaking raw materials coking coal and coke, which fell 3 percent and 2.4 percent respectively.