Chinese authorities on Thursday warned about irrational trading in metals prices, prompting strong pullbacks in metal prices, and signalling that Beijing is growing wary about repeating booms and busts in the country’s commodities markets.

The China Iron and Steel Association (CISA) said in a statement that prices for steel futures weren’t driven by demand or supply reduction, but “over-interpretation, or even misinterpretation” with regards to capacity cuts, clean-ups of illegal steel production and environmental protection policies.

The association warned that some traders drove up prices for their own profits by making exaggerated conclusions that steel prices will soar in the second half of 2017.

Some investors were spooked by the official warning. Benchmark steel rebar futures traded in Shanghai tumbled 3.5 per cent to 3,830 yuan a metric ton, giving up this week’s gains. Iron ore futures listed on the Dalian Commodity Exchange plunged 5.2 per cent to 533.3 yuan a ton, on track for their biggest single-day loss in nearly three months. The acceleration in the sell-off was also triggered by rumours that the Shanghai Futures Exchange may raise margin requirements for steel rebar contracts if trading volumes remain high.

The strongly-worded announcement came after the price for the most actively traded steel rebar in Shanghai hit a five-year high earlier this week and it indicated rising scrutiny from authorities over the sharp rallies that roiled China’s commodities markets, from steel rebar to iron ore and aluminium. It also underscores Beijing’s fixation with market stability ahead of a top-level leadership reshuffle this fall.

China launched a supply-side reform for the steel and coal industries in 2016 to reduce excessive production. Trade tension with the U.S. and E.U. remains heated. Beijing’s crackdown on illegal steel capacity this year further stoked expectations of tightening supply, fuelling rallies on spot and futures markets.

“Speculations in steel-related metals has been a common scene thanks to strong influx of funds,” said Fan Qingtian, an analyst at Nanhua Futures Co., “However, the government has strong incentive to tame the rally if the price surge risks stoking inflation and affect people’s [livelihoods].”

On Friday, the benchmark steel rebar traded in Shanghai slipped 0.2 per cent to 3,961 yuan a metric ton and the iron ore futures listed on the Dalian Commodity Exchange recovered to trade 0.2 per cent lower at 562 yuan a ton. Steel rebar futures have surged nearly 40 per cent this year, while hot-rolled coil, a key steel product, has also risen more than 20 per cent since the beginning of 2017.

The CISA summoned futures companies, steel companies and consulting firms on Wednesday to analyse reasons behind the “abnormal price movement,” according to the statement.

By YIFAN XIE
Dow Jones

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