Goldman Says China's Iron Speculation ‘Concerns Us the Most’

  • Daily volumes in Dalian can top annual imports, analysts say
  • Trading is up more than 400% compared with a year ago

What's Behind the Iron Ore Rally

Goldman Sachs Group Inc. has expressed its concern about the surge in speculative trading in iron ore futures in China, saying that daily volumes are now so large that they sometimes exceed annual imports.

The increase in futures trading in the world’s largest importer was among factors that have lifted prices, according to a report from analysts Matthew Ross and Jie Ma received on Tuesday. Iron ore volumes traded on the Dalian Commodity Exchange are up more than 400 percent from a year ago, they said.

“While increased fixed-asset investment in China, a bring-forward of steel production (ahead of a government curtailment) and mining disruptions help to explain the strong rally in the iron ore price, the one driver that concerns us the most is the increased speculation in the Chinese iron ore futures market,” they wrote.

Iron ore has rallied in 2016, buttressed by the explosion in speculative trading in China’s commodity futures markets as mills boosted monthly output to a record. The spike in raw materials trading in China has stunned global markets, according to Morgan Stanley, which cited the jump in local activity in iron ore as well as steel. The increase has prompted exchange authorities in Asia’s top economy including Dalian to tighten rules on the trading of some contracts.

‘Greater Than’

“There have been two days in the past month where futures volumes have been greater than the total amount of iron ore that China actually imported for the whole of 2015 (950 million tons),” the Goldman analysts wrote. To slow trading activity, the Dalian exchange has announced it would be increasing margin requirements and transaction costs on iron ore futures, they said.

Iron ore futures have rallied 40 percent on the Dalian exchange this year after gaining 16 percent last week. The most-active contract dropped as much as 4.4 percent on Tuesday after the exchange doubled trading fees. The benchmark spot price for ore with 62 percent content delivered to Qingdao fell 5 percent to $62.78 a dry ton on Tuesday, up 44 percent this year, according to Metal Bulletin Ltd.

Other raw materials in China were also in retreat on Tuesday. Coking coal futures, which trade in Dalian, reversed early gains to lose as much as 5 percent to 777.5 yuan ($120) a ton. After bottoming in November, prices are still 38 percent higher so far this year.

The higher fees are part of an expanded effort to curb excessive speculation, the Dalian exchange said on Monday, adding that it has increased supervision and doesn’t rule out taking more stringent measures if needed. The moves follow its decision last week to raise minimum margin rates.

Goldman has said it’s bearish on iron ore as it expects a return to global oversupply on increased output from mines. The current rally is unsustainable, the New York-based bank said last week in an interview and a report, forecasting prices will probably slump to $35 a ton by the end of 2016.

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