Ferro-silicon and the madness of Chinese crowds: Andy Home

LONDON (Reuters) - How much do you know about ferro-silicon?

Unless you’re a specialist in the field of ferro-alloys, the answer to that question is probably “not very much”.

Although it’s an essential input into many different types of steel product, ferro-silicon is one of those industrial materials that barely registers with the general public.

Search for it on Google and you’ll get less than 400,000 “results”. Do the same for aluminum and you’ll get over 400 million.

Try the search in Chinese, though, and you may get a different outcome because this esoteric part of the global manufacturing chain has experienced a mini mania over the last few weeks.

Not that the thousands of Chinese punters who have bought into the Zhengzhou ferro-silicon market are experts in the world of ferro-alloys either.

Rather, it is just the latest Chinese commodities market to experience the turbulent effects of an investment crowd surge.

Such stampedes are becoming more frequent and are hitting ever more parts of the commodity trading spectrum with increasingly chaotic effects on pricing.

Graphic on Zhengzhou ferro-silicon contract:


The Zhengzhou Commodity Exchange (ZCE) launched its ferro-silicon contract in August 2014.

After an initial flurry of activity, both volumes and open interest flatlined over the course of 2015 and most of 2016.

Volumes totaled 1.32 million lots last year with open interest just 2,700 lots at the end of December.

Fast forward eight months and ferro-silicon trading has gone super nova.

Volumes over the last five trading days have totaled an astonishing 2.82 million contracts, while open interest has exploded to 138,396 contracts from just 30,100 at the start of August.

On one day alone - Tuesday, Aug. 23 - Zhengzhou traded the equivalent of 3.3 million tonnes of ferro-silicon, which is getting close to around half the size of the annual global market.

Not entirely surprisingly, this trading surge caused prices to spike from 5,600 yuan per tonne at the start of the month to just over 7,800 yuan on Aug. 24.

Profits presumably booked, the crowd is now leaving just as quickly as it appeared before the exchange implements higher trading fees on Friday.


What has an obscure market like ferro-silicon done to warrant such attention?

Analysts at Jefferies Equity Research, one of the very few mainstream houses to cover the market, argue that both silicon metal and its alloy derivatives are benefiting from a combination of rising input prices, improving demand and constrained supply.

But that doesn’t explain the ferocity of this month’s price rise nor what is shaping up to be an equally violent counter-reaction.

Rather, ferro-silicon appears to have been flavor of the month simply because it is used in steel and trading in China’s steel and iron ore contracts was getting too hot for many punters.

You can track the movements of China’s commodities crowd by the measures taken against it by the authorities.

The first clamp down against speculative excess came on Aug. 11, when the Shanghai Futures Exchange (ShFE) announced fee hikes and position limits on its steel rebar contract.

One week later, on Aug. 18 the Dalian Commodities Exchange did the same with other components of the ferrous trading suite such as coke, coking coal and iron ore.

Money then migrated to steel-related contracts such as zinc, used in galvanized steel, and ferro-silicon, leading to more counter-measures by both ShFE (Aug. 21) and Zhengzhou (Aug. 17 and again on Aug. 30).

Note that the weapons of choice for exchanges in damping excess are margin hikes and intraday trading fees, attesting to both the high leverage and high speed of China’s crowd traders.


This week it was ferro-silicon. Next week it could be something else.

Maybe silico-manganese, the sister contract on the Zhengzhou exchange. It has seen some spill-over activity but nothing quite as dramatic as the ferro-silicon contract.

But it could, equally, be aluminum or copper or lead.

No-one, least of all the crowd itself, seems to know.

There are only a few broad rules of this Chinese trading game.

First, it helps to have a strong story line to catch everyone’s attention. The bull narrative in China’s steel sector is one of booming production and profits thanks to the government’s ongoing elimination of outdated capacity.

Second, it helps if the crowd has some previous experience of trading the contract.

This, for example, is the third time the Zhengzhou ferro-silicon contract has seen volume and open interest surges. The latest is, by some margin, the greatest.

Third, the trading trigger seems to be market momentum, the crowd surging into a market that is already moving, a mass-human replica of how many algorithmic trading programs work in western markets.

The fourth, perhaps most important, ingredient in this recipe for market mania is the ability of the crowd to communicate via mobile and internet chat rooms.

This is a “flash” investment mob that can switch investment targets as quickly as it takes to tweet.


This is all a very new phenomenon for industrial metal markets, which have by and large traded for many, many years with little or no interest from the man in the street.

But it is the fourth time since the start of 2016 that Chinese exchanges have been forced to tweak the cost of trading to deter animal spirits.

And these bouts of extreme activity are increasingly having real-world consequences.

Most commentators in the iron ore market will concede that physical prices are now following futures market prices, however irrational the latter may at times be.

In markets such as copper and aluminum, futures pricing in China has increasing influence on London Metal Exchange (LME) pricing, against which much of the world’s physical trading activity is settled.

And only a very small part of what LME brokers call the “onshore casino” makes it through China’s great currency wall.

There is a sense that the pricing impact could be much greater if China starts to connect to international markets.

Hong Kong Exchanges and Clearing (HKEx) has already opened up such connector channels for stocks and bonds. So far at least the owner of the LME hasn’t been able to do the same for metals.

That, many metal market participants might think, is just as well.

Because although “industry” has always bemoaned the excesses of “speculation”, no-one has ever seen speculation on this scale before.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Editing by Susan Thomas