News

Lately in China it’s been the Kentucky Derby, the Grand National and the Dubai World Cup all rolled into one. Except, it’s not stallions but sinter feed that has been the star turn—not well-reared horses but reinforcing bar the center of attention. Picture this: after a lunch with market sources in Shanghai, you and your colleague are discussing metals and coal, when you suddenly hear in the background someone else talking about rebar; not just rebar, but hikes in margin requirements to trade rebar futures in order to curb speculative trading activity. Am I hearing things? No, you strain your ears and realize it’s the local radio disc jockey. Talking about steel futures. It was an epiphany moment: you realize that the age of financialization in China’s commodity markets has already begun: futures contracts go mainstream. Or perhaps, rather than financialization, it is the retail-ification of commodities in China. Anyway, enough grammatical acrobatics. Analysis posted in a note by the Commonwealth Bank of Australia points out that the average time a futures contract is held on the main product venues in China (the Dalian Commodity Exchange for iron ore and the Shanghai Futures Exchange for rebar) is in and around the four hour mark. Compare this to around 60 hours for COMEX’s copper contract or around 70 hours for NYMEX natural gas, and it is clear that speculative positions are the norm for ferrous contracts listed in China. What is also noticeable is the minimal open interest to traded volume on the DCE contract, implying that hedging is minimal. SHFE and DCE have acted in response. DCE has moved its margin requirements up twice in a short space of time, reaching 8% on Monday, April 25. This, added to a change in exchange fees, has prompted a drop in liquidity—which topped 700 million mt on April 20. Some commentators pointed out that the financial churn on these contracts approached levels of trade seen on the S&P 500 in mid-April. Given that these China-based contracts largely have local participants and are really focused on domestic or import markets, thes...