Manila - 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 ton. 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.
On the Shanghai Futures Exchange, rebar - reinforced steel used in construction - fell 3.8 percent to close at 2,554 yuan a ton.
Rebar reached a 19-month high of 2,787 yuan on April 21, when its turnover was worth nearly 50 percent more than the total value of trade on the Shanghai stock exchange.
Open interest in iron and rebar has fallen sharply, suggesting some of the trades are being executed by investors holding short positions that are getting squeezed.
Coking coal on Dalian closed nearly flat at 797.50 yuan a ton after hitting a contract-high of 837.50 yuan earlier. Coke trimmed gains to 0.4 percent after rising as much as 4 percent. The two had soared by their 6 percent limit on Monday.
Cotton on Zhengzhou Commodity Exchange also closed little changed after spiking as much as 3.6 percent.
Jin Tao, analyst with Guotai Jun'an Futures in Shanghai, said there is a “severe shortage” of coking coal and coke following shutdowns of mines and plants in China last year as steel mills step up production.
That has fuelled a big spike in spot prices of the two raw materials, particularly this month, said Jin.
“Whether the rally can be sustained will depend on whether the government will keep reining in the sector. But falling forward contracts suggest investors remain cautious on the outlook,” he said.
REUTERS