(The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, April 26 (Reuters) - Nearly 240 million tonnes of steel rebar traded on the Shanghai Futures Exchange (ShFE) last Thursday.
That was equivalent to around a third of China’s steel production last year, not just of construction-destined rebar but of every imaginable type of steel product.
And if that sounds like a lot of steel, consider the fact that on March 10 this year trading volumes on the Dalian Exchange iron ore contract exceeded one billion tonnes, more than the combined annual output of Rio Tinto , BHP Billiton and Brazil’s Vale.
OK. So there’s an element of double-counting at work here since Chinese exchanges tend to include both sides of a trade in their volume figures.
But there’s no disguising the surge in speculative interest that has been sweeping across the spectrum of Chinese commodity contracts, from iron ore to corn to polypropylene.
The flood of money has propelled prices of commodities such as iron ore and steel rebar sharply higher.
Now, however, the authorities have moved to tame the animal spirits firing up Chinese markets with a series of measures such as raising margin requirements, hiking transaction fees and widening daily limits.
They seem to have done the immediate trick with volumes and prices losing some of their froth this week.
But there is a sense that Chinese investors, having once tasted the profitable elixir of trading commodities, are not going to be beaten back for long.
We may be witnessing the start of a whole new chapter in the long-running, stormy story of speculators versus real-world commodity supply chains.
Graphic on Dalian iron ore trading:
Graphic on Shanghai steel rebar trading:
Graphic on Shanghai aluminium trading:
Gold has always been the investment of choice for retail money, both in the West and in China.
But in China speculative interest has been building for a while in markets that in the West have largely been shunned by the man in the street.
In January last year London copper slumped 11 percent in the space of two days after a concerted bear attack by Chinese funds on the ShFE contract.
It was the first time the London Metal Exchange, where activity is almost exclusively conducted by big industrial and financial players, found itself at the mercy of another market-place.
And those Chinese bears returned to attack copper on the short side in both July and November.
Western traders woke up to the existence of powerful Chinese hedge funds such as the exotically-named Shanghai Chaos.
And in November it wasn’t just copper that got hit. There were crowd selling surges in metals such as aluminium and lead, both of which had largely traded below the radar of most local investors.
The key change appears to have been the Chinese authorities’ clamp down on stocks trading last year in reaction to excessive volatility.
Chinese retail investors simply switched their focus to the commodities sector, laying the foundations for this year’s remarkable explosion in trading activity.
The measures taken to cool overheating markets reveal much about this new type of investor, one who trades on margin (now hiked across the board) and one who is in and out in the space of a day (no more commission discounts for Dalian iron ore day-traders).
One of the reasons why the Chinese authorities are moving to try and tame run-away markets is because excessive speculation in commodities can quickly feed through into real-world consequences.
The bear attacks on industrial metals last November caused massive consternation among China’s own producers, who appealed for government help in the face of “malicious short-selling”.
There was frantic talk of concerted production cutbacks, emergency stock-piling and direct government assistance. With hindsight much of it amounted to price-signalling, a warning to short-sellers to back off, although in copper there was concrete government action in the form of purchases from the State Reserves Bureau.
This time around with investment surging on the long side, the real-world impact has been even more far-reaching.
There’s no doubt that Chinese players understood early the likely effects on the entire ferrous supply chain of renewed government stimulus in the form of credit expansion and infrastructure build.
Prices of physical commodities were always going to react higher but the scale and the speed of the price rallies have been unprecedented.
The price of physical iron ore jumped by 20 percent on March 4 and it did so because of the rocketing price on the Dalian exchange, which in turn was being fed by the rocketing price of steel futures in Shanghai.
Steel rebar prices have lost some of their froth but are still trading at levels last seen in January 2015.
The result has been the wholesale reactivation of idled steel production in China. National output jumped from an annualised 736 million tonnes in February to 832 million tonnes in March.
Not only does this run counter to Beijing’s own policy about phasing out surplus steel capacity but it is intensely problematic in the context of escalating criticism and accumulating trade sanctions from other steel-producing countries.
But such, apparently, is the cumulative power of the Dalian and Shanghai day-traders.
It’s ironic that Chinese investors have just found the commodities space when Western investors have lost much of their previous appetite.
Western retail investors never really embraced the host of new products launched at the turn of the decade, preferring to stick with tried and trusted vehicles such as gold exchange-traded funds.
Wholesale investors, meanwhile, became disillusioned both with the theoretical arguments of commodities as portfolio stabilisers and with the more prosaic collapse in commodity prices from their early-decade peaks.
Barclays Capital estimates that assets under management in the commodities sector ended last year at around $160 billion, the lowest level since 2007.
The investment baton, as it were, has been passed to the Chinese investor, who has easier and cheaper access to commodity markets and cares less whether it’s corn or copper as long as it’s moving in the right direction.
And although the day-traders might well take fright at the raft of weapons being used by the country’s exchanges, there’s a sense that the real investment trend in commodities has only just got going.
China’s giant mutual fund industry, estimated to have managed 8.4 trillion yuan ($1.3 trillion) by the end of last year, is showing increasing interest in diversifying away from turbulent stock markets.
Shenzhen-based UBS-SDIC Fund Management in August 2015 launched the first Chinese mutual fund product to invest in local commodities in the form of a ShFE silver futures tracker.
Others are following the same path.
Fortune SG Fund Management is planning a fund to track the Shanghai copper contract, while Huatai-Pine Bridge Investments wants to start a fund to track an index of several agricultural futures.
The Chinese commodities investment genie is well and truly loose and the authorities are going to have a tough time putting it back in the bottle.
Editing by David Evans