Iron Sinks as China Stomps on Frenzy That's Concerned Goldman

  • Dalian raises trading charges to curb `excessive speculation'
  • `Prices have overshot fundamentals,' says IG's Nicholson

Iron ore retreated for a fourth day after commodity exchanges in China intensified a crackdown on speculative trading in raw materials that’s pushed volumes to record levels in the world’s biggest user and driven prices beyond levels that may be justified by underlying fundamentals.

Ore with 62 percent content delivered to Qingdao fell 2.7 percent to $61.09 a dry metric ton on Wednesday, after sliding 11 percent in the previous three sessions, according to Metal Bulletin Ltd. While the fourth straight decline is the longest run this month, it still leaves prices 40 percent higher this year. 

Iron ore had surged as China added stimulus, presiding over a rebound in the property sector that then helped to ignite a frenzy of speculative trading in the nation’s commodity markets. Goldman Sachs Group Inc. expressed concern about the upsurge, and BMI Research flagged the risk of a collapse in speculation as rules were tightened. China’s Dalian Commodity Exchange, which trades iron ore futures, has boosted trading charges, vowing a clampdown on what it termed “excessive speculation.”

‘Set to Reverse’

“Fundamentals provided the initial momentum in Chinese commodity futures, speculation soon drove it higher,” Angus Nicholson, a market analyst at IG Ltd. in Melbourne, said on Wednesday before the price data were published. “Iron ore prices have overshot fundamentals, pushed higher by momentum-seeking retail traders, and they look set to reverse.”

To slow trading activity, the Dalian exchange announced it would raise trading charges on iron ore futures.

“We’re trying to clamp down firmly on the trend of excessive speculation in some commodity trading,” it said. “We’ll be highly vigilant and adopt further measures if necessary.” Futures in China retreated for a fourth day on Wednesday.

Goldman Sachs has said the increased speculation in China’s iron ore futures “concerns us the most,” adding that daily volumes were now so large they sometimes exceeded annual imports. The rally is unsustainable, the New York-based bank said last week in an interview and a report, forecasting prices will slump to $35 by year-end.

Speculative activities in China will be vulnerable to a sharp reversal, once the upward price momentum wanes, BMI Research, a unit of Fitch Group, said in a report that drew parallels with a rally, followed by a slump, in Chinese equities last year. Should demand for commodities weaken, there was a risk of a “potential collapse in domestic Chinese commodities speculation,” it said.

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