China's Improbable Commodities Frenzy Leaves Stocks in the Dustby and
Eggs to cotton and steel surge as speculators pile in
Equity market turnover is back to levels not seen since 2014
The wild ride in China’s commodity futures is making the nation’s $5.9 trillion stock market look docile.
Here’s the action in charts:
Compared with the stock market, even eggs have been a better investment in China in 2016, with futures climbing 27 percent. That’s as the cost of a dozen eggs in the U.S. slumped 24 percent in the first quarter. The epicenter of the commodities boom, however, has been steel reinforcement bars, which have surged 38 percent. The dizzying increase in speculative activity prompted the head of the world’s largest metals exchange to say that some traders probably don’t even know what they are buying or selling. The Shanghai Composite Index is down 15 percent this year.
Fluctuations in steel futures have sent a gauge of price swings to the highest level on record. Rebar surged 29 percent in Shanghai from the end of March through April 22, before dropping about 11 percent. Bourses in Dalian, Shanghai and Zhengzhou have announced measures to cool the commodities boom including higher fees and a reduction in night hours. Meanwhile, volatility on the Shanghai Composite, which saw gut-wrenching moves over the summer and the start of 2016, has fallen to the lowest level in more than a year as the market turned flat.
The intensity of futures trading on Chinese commodities exchanges is making some of the world’s most liquid markets look leisurely. The average iron ore and steel rebar contracts on the Shanghai Futures Exchange are held for less than four hours, compared with almost 40 hours for WTI crude futures on the New York Mercantile Exchange.
The equivalent of 41 million bales of cotton traded in a single day on the Zhengzhou Commodity Exchange last month, 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.
While some of the rebar rally has been underpinned by improving demand, warnings are stacking up fast. The rapid advance isn’t sustainable as mills are expected to bring back idled capacity, raising supply, according to Fitch Ratings.
For a reminder what a boom-bust looks like in China, look no further than the equity market. After more than 1.3 trillion yuan ($200 billion) of stocks changed hands a day in Shanghai at the peak of last year’s frenzy, full-day turnover has slumped to levels not seen since October 2014. The benchmark equity index, which closed little changed on Wednesday, remains 42 percent below the seven-year high reached in June.