RPT-COLUMN-China's commodity trading curbs are working, at least for now: Russell

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LAUNCESTON, Australia, May 2 (Reuters) - - It’s sometimes tempting to take a Western view of China and conclude that Beijing’s attempts to limit speculation in commodity futures in order to prevent price bubbles are ill-advised and ultimately doomed to failure.

It’s likely that market participants schooled in the Western ethos of light-touch regulation will baulk at China’s latest attempt to force the market, in this case for commodities, to behave in the fashion deemed appropriate by the authorities.

The China Securities Regulatory Commission (CSRC) said on April 29 that it won’t allow domestic commodity futures markets to become a “hot-bed” for speculators, comments that confirmed a Reuters story that exchanges in Dalian, Shanghai and Zhengzhou had been asked to bring speculative trading under control.

The measures implemented by the exchanges include raising trading margins, with the Dalian Commodity Exchange lifting them to 8 percent from 7 percent for iron ore, as well as boosting transactions costs.

Dalian also increased transactions fees on coke and coking coal contracts three times between April 22 and April 28, as well as boosting the minimum margin to 9 percent from 8 percent.

The Shanghai Futures Exchange increased transactions fees for steel rebar to 0.01 percent from 0.006 percent on April 25, and also cut night trading hours by two hours from four hours previously.

While other commodities were also affected by new measures, it’s worth noting that the biggest, and most aggressive changes, were in the steel complex.

This is logical given it appears much of the froth in China’s commodity markets has been driven by rapid price spikes in steel, as well as for its raw materials, iron ore and coking coal.

Dalian iron ore futures surged 65 percent from the end of last year to the peak of 479 yuan ($74) a tonne, reached on April 25, the day the first of the restrictions were announced.

Since then the price has slipped to close on April 29 at 456 yuan a tonne.

But more importantly, the volumes of contracts traded has plummeted, with 1.911 million exchanged on April 29, down from the record 10.46 million on March 10 this year.

By way of comparison, daily volumes for iron ore futures in 2015 ranged from around 150,000 to about 5 million.

At the record volume of over 10 million contracts, it meant that paper iron traded on that day was just over 1 billion tonnes, which is more than China’s imports for the whole of 2015, which totalled 952 million tonnes.

It was much the same story for coking coal, with daily volumes dropping from a record 1.536 million contracts on April 26 to just 530,996 on April 29, which is closer, but still above, the peak day for 2015 of 437,638 contracts on Nov. 20.

Shanghai rebar volumes slumped from 23.97 million on April 21 to 11.42 million on April 29, a figure still near the top of the 2015 range of about 900,000 to 13 million.


While it’s still early days for the new measures, it appears on first blush that they are working exactly as intended.

Prices have come off, but not plummeted, and volumes are also down, but not so much as to raise concerns that liquidity is being choked off for legitimate users of futures contracts, such as steel mills, miners and major commodity traders.

Again, there is still much that could go wrong, but it seems that this intervention is playing out more successfully than last year’s measures to stop short-selling that roiled China’s equity markets.

Perhaps it’s easier to calm a speculative bubble than it is to stop people selling in a market that’s already heading south.

The main risk is that the measures to calm markets end up driving away major users of the market, thus hurting the very people they are intended to help.

It’s possible that once the hot money goes to find the next trendy asset class the measures will be relaxed, but one thing market participants tend to hate is uncertainty and constantly changing rules and regulations.

Certainly, steel mills, miners and commodity traders should welcome a market that is trading in a more rational fashion.

It’s clear that the huge price gains this year weren’t really supported by any major fundamental shift in the supply-demand dynamics for iron ore, coking coal and steel.

While some gains in recent weeks would have been justifiable on the basis of an improving outlook for steel demand on the back of stimulus spending on infrastructure and construction, as well as re-stocking of the supply chain, it doesn’t appear that rallies of more than 60 percent were warranted.

In coming weeks if prices tend to ebb and flow in line with a combination of news events and supply-demand data, and commodity volumes stabilise at levels closer, or above, their longer-term norms, then the CSRC is likely to be able to claim victory, at least in this round. (Editing by Joseph Radford)