China Rebar, Iron-Ore Futures Tumble on Warning Over Unsustainable Rally -- Update

China metal prices tumbled Wednesday as sentiment was battered by fresh warnings that the recent steel rally was unsustainable, the latest move by regulators to tame volatility in the futures market.

The main steel-rebar futures contract in Shanghai snapped a four-day rally to trade down 4.9% by midday Wednesday at 3,744 yuan ($562) a metric ton, on track for its biggest daily loss since May, while hot-rolled coil futures tumbled 5.3% to 3,828 yuan a ton.

On the Dalian Commodity Exchange, iron-ore futures fell 4.5% to 574.5 yuan a ton, after soaring more than 20% over the past four sessions.

The China Iron and Steel Association (CISA) said steel prices surged in July thanks to a confluence of factors including stable demand, capacity cuts and policies to reduce pollution. The association said the surge "goes against stable operation of the steel industry". However, the surge is unlikely to persist in the coming months as new capacity is set to ease a potential supply shortage, said CISA in a statement late Tuesday.

The industry body also said higher iron ore prices and a surge in steel-product prices triggered 19.3 million tons of decline in steel exports during the first seven months this year, down 29% from a year ago.

On the same day, the country's top prosecutor vowed to intensify a crackdown on financial crimes that disrupt securities and futures markets. It will thoroughly investigate and deal with "financial crocodiles" who have caused a stir on the market as well as those engaged in insider trading, the Supreme People's Procuratorate said.

"Investors fled the market out of rising pressure from policy-makers, who wants to avoid big fluctuations on the commodity market," said Ye Yanwu, research director at Chaos Ternary Futures.

"We believe that downstream demand will remain relatively robust in the later half of this year, which could cause a slight supply shortage," added Mr. Ye.

Stronger-than-expected economic growth in China, a weaker U.S. dollar and government-led capacity cuts have buoyed bullish sentiment in metals futures this year to multi-year highs. The rally also fuelled growing unease with Beijing for fear of repeating a boom-and-bust as speculators swarmed into trading metals.

"The strong rally in steel and iron-ore prices in recent weeks is vulnerable to an expected moderation in construction sector activity in coming months, together with oversupply conditions for iron ore, with still-high stockpiles of iron ore at Chinese ports," said Rajiv Biswas, APAC Chief Economist at IHS Markit .

"Strong speculative trading in Chinese commodities markets has also contributed to the metals and iron-ore price rally, creating risks of greater price volatility," he added.

In July, China's iron-ore futures jumped 18% while steel rebar gained 15% before a period of correction kicked in following official warnings over irrational speculation. Yet both metals rebounded to year-to-date highs last week as investors bet on supply shortage later this year.

Chinese authorities have ramped up efforts to contain sharp rallies in metals futures ranging from rebar to zinc in recent months.

The CISA said on Aug. 10 that the surge in rebar futures was due to "speculative" behavior that was not caused by demand or reduced market supply. Last Monday, the Shanghai Futures Exchange raised transaction fees for two main steel-rebar contracts to curb excessive speculation.

The exchange also raised transaction fees for zinc futures for delivery in October and November, as well as lowered maximum daily open positions to 2,000 lots starting Wednesday.

Zinc futures dropped 1.1% at 25,920 yuan by midday Wednesday, after climbing 7% over the past week.

"We have had a reaction as China has closed some of its capacity which has improved the market, but the underlying demand in the market is probably not going to improve," said Ric Spooner, chief markets analyst CMC Markets. "Those underlying fundamentals are getting pretty fully priced at around current levels."

A J.P. Morgan report this week said that "with the exception of aluminum, we still see fundamentally weaker markets in the second half of the year, especially towards year-end."

--Yifan Xie and Biman Mukherji

(END) Dow Jones Newswires

August 23, 2017 02:34 ET (06:34 GMT)