- Futures volumes jumped amid wider surge in commodity liquidity
- Exchanges raise fees, reduce hours to curb speculative trading
It’s not just metals caught up in China’s commodity fever.
The equivalent of 41 million bales of cotton traded in a single day on the Zhengzhou Commodity Exchange last week, the most in more than five years and enough to make almost 9 billion pairs of jeans, or at least one for every person on the planet. Prices that had slumped to the lowest on record in February surged almost 19 percent in the four days leading up to the trading spike on Friday.
Traders have piled in to Chinese commodity markets, sending volumes of everything from steel to coking coal soaring and prompting exchanges to boost margins and fees or issue warnings to investors. The surge in trading is reminiscent of last year’s equities rally that boosted the stock market before a rout erased $5 trillion. China is the world’s largest consumer of cotton and second-biggest producer.
“Record low levels in February and March sparked buying interest from both inside and outside of the cotton industry and also triggered speculation, which resulted in mounting bets in Zhengzhou futures,” said Liu Qiannan, a Beijing-based cotton analyst at Galaxy Futures Co. “With massive investment and encouragement from the crazy steel and iron ore market in China, sentiment then turned to bullish from bearish.”
More than 3.6 million contracts of 5 metric tons apiece traded in Zhengzhou on Friday. With Chinese exchanges double counting volume to account for the long and short side of a trade, that’s still about 9 million tons, or 41 million bales. One bale can make 215 pairs of jeans, according to the National Cotton Council of America.
On the same day, about 1.6 billion pounds traded on ICE Futures U.S. in New York. That’s about 3.3 million bales, or more than 700 million pairs of jeans, enough to dress only the U.S., Brazil and Japan in denim.
China’s cotton purchases have been in the spotlight before. In 2011, the government set a minimum price and began stockpiling the commodity to support domestic growers. That encouraged them to hoard the material and caused a jump in futures to an all-time high in March of that year. The contract for September was at 12,705 yuan ($1,955) a ton, up 11.5 percent this year.
In response to the trading frenzy, the Zhengzhou exchange this week raised trading charges for cotton futures to 6 yuan per lot from 4.3 yuan and said it will raise margin requirements and daily trading bands for all futures for the coming Labor Day holiday. Nobody answered two calls to Zhengzhou Commodity Exchange’s news and propaganda department outside business hours.
The steps by Zhengzhou and other bourses including the Dalian Commodity Exchange are making it more expensive for investors to trade commodities futures in China. Morgan Stanley has said the surge in speculative trading had stunned global markets, citing a jump in activity for eggs and cotton as well as iron ore and steel.
Goldman Sachs Group Inc. has expressed concern about the surge in speculative trading in Chinese iron ore futures, saying that daily volumes are now so large that they sometimes exceed annual imports.