Iron ore, steel lead China commodities retreat as curbs bite

MANILA/SHANGHAI (Reuters) - A major Chinese commodities exchange took further steps to calm volatile markets on Wednesday, hiking transaction fees and widening trade limits in a move that could make exiting futures contracts more orderly.

An employee inspects newly-made steel coils at a steel plant in Lianyungang, Jiangsu province October 11, 2014. REUTERS/China Daily

Iron ore and steel futures fell again in reaction to higher trading costs, brought in to deter speculative investors believed to be behind last week’s spike in prices and volumes that had stoked fears of a destabilizing crash.

The Dalian Commodity Exchange said it would double the transaction fees on steelmaking raw materials coking coal and coke futures from Thursday, the fourth increase in a week.

It later announced that from April 29 it would further widen the trading limit for coking coal and coke futures to a 7 percent move in either direction from 6 percent, a step that could potentially reduce trading disruptions.

The exchange also said the minimum margin for both contracts would be increased to 9 percent from 8 percent previously.

Dalian had also raised transaction fees on iron ore futures twice this week as the exchange, along with other commodity platforms in Shanghai and Zhengzhou, imposed curbs to restore calm to markets after a week-long surge unsettled global investors.

The curbs implemented by the exchanges appeared to be having the desired effect, said Wang Di, analyst at CRU consultancy in Beijing.

“What they’re trying to do is minimize too much speculation, especially from the retail investors.”

Analysts said speculators were betting that a rise in infrastructure spending in China would lift raw material prices, which have been depressed for years by a persistent supply glut.

The rapid price gains have defied the supply-demand balance of the underlying commodities, and analysts warned there was a risk of a bigger correction ahead, similar to last summer’s crash in Chinese shares that also followed a rapid run-up.

“If prices in China go too far off from fundamentals, markets in China could lose credibility, similar to what had happened in the stock market,” Citigroup analysts said in a report.

The most traded September iron ore contract on the Dalian Commodity Exchange DCIOcv1 dropped by its 6 percent downside limit for a second day in a row on Wednesday, before closing 5.4 percent lower at 434.50 yuan ($66.95) a ton.

Coking coal DJMU6 and coke DCJU6 on Dalian also slid by the 6 percent maximum allowed by the exchange, but coke slightly trimmed losses to end down 4.9 percent.

On the Shanghai Futures Exchange, rebar - or reinforcing bar used in construction - fell 3.7 percent to 2,500 yuan a ton SRBcv1. The less-traded hot rolled SHHCV6 tumbled by its 6 percent downside limit before closing 4.6 percent lower.

After raising the transaction fee on iron ore futures contracts twice, the Dalian exchange said it “will step up supervision and resolutely curb signs of overheated speculation in some products to prevent risks and maintain steady operations of markets”.

Wednesday's pullback was concentrated on steel and steelmaking futures, but other commodities also slipped. Cotton on the Zhengzhou Commodity Exchange CCFU6 and egg futures on Dalian DJDU6 each fell nearly 2 percent.

Additional reporting by Beijing Monitoring Desk; Editing by Will Waterman and Mike Collett-White