Iron and Steel Fall After China Raises Transaction Costs

Iron ore and steel futures in China fell sharply on Tuesday after authorities raised transaction costs to cool last week’s rapid gains in Chinese commodities, which had raised fears of an unstable speculative bubble forming.

Base metals futures also fell, while other commodities, including coking coal and cotton, surrendered most of their early gains to end nearly flat.

China’s top commodity exchanges in Dalian, Shanghai and Zhengzhou have increased trading margins and fees in response to surges in prices and volumes last week that were not matched by an improvement in the fundamentals for most of the underlying commodities.

The most traded September iron ore contract on the Dalian exchange closed down 6 percent at its exchange-set floor of 450.50 yuan ($69.35) a tonne. It hit 502 yuan on Monday, its strongest since August 2014.

Analysts say the spike was largely due to speculators betting that a rise in infrastructure spending in China would lift raw material prices, which have been battered for years by a broad-based glut.

But analysts warned that the rise could flip into an equally precipitous fall.

“The speculation-driven futures rallies are not sustainable, and consolidation may have some spillover effects on the spot market,” Argonaut Securities Helen Lau said in a note.

News that China’s top steel making province will ban the reopening of steel mills that had been previously ordered to shut down also weighed on sentiment for commodities used in steelmaking, which include iron ore, coking coal and coke.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza