Li Keqiang is said to be cautious about relying too heavily on China’s GDP numbers, preferring data on rail freight and power consumption for a fuller picture of its economic health.
So it sounds like the Chinese Premier might have been on fact-finding form last weekend, when he stopped at a motorway service station in Sichuan to quiz truck drivers about the cargo they were carrying.
In one case, Li said he was pleased to hear that prices for a lorry-load of sandstone were going up because it would afford the driver a better living. But he might be more circumspect about some of the other indicators this month, especially the prices of some industrial commodities, which have rallied in explosive style.
Steel prices are up significantly and iron ore hit $70 a tonne last week, an increase of more than 80% from its December lows. Miners like Fortescue, BHP Billiton, Rio Tinto and Vale have seen their share prices soar, while commodity currencies like the Australian dollar have been strengthening too.
Back at home in China – where six out of the world’s 10 most active commodity contracts are now traded in Shanghai, Dalian and Zhengzhou – the sentiment has been especially bullish. In fact, the Financial Times said this week that a “near mania has gripped China’s commodity futures markets in the past month”.
Earlier this week, futures prices for the reinforcing steel used in construction (rebar) were up more than half for the year so far in Shanghai. Indeed, contracts for more than 223 million tonnes changed hands last Thursday alone, a larger amount than China’s full-year production of the commodity.
Activity was similar for iron ore contracts in Dalian, where trading volumes on some days have been greater than Chinese imports of ore for the whole of last year.
These are confusing signals, especially from the steel sector, where WiC has reported recently about the difficult conditions (see WiC320).
The fundamental question is how much of the climb in prices reflects the facts of the Chinese economy, or whether it is more of a speculative fad. Spot prices have also been rising rapidly, with the price of physical iron ore moving in line with the futures on the Dalian exchange, as well as the surge in steel futures in Shanghai.
The higher values do partially reflect stronger underlying performance in the economy. As Qu Hongbin, HSBC’s Chief China Economist, reported last week, investment, industrial production and retail sales all performed better than expected in the first quarter. The recovery in the property market also continued through March, with housing sales growing by a third year-on-year, the strongest pace since 2013.
Buoyed by a flood of new credit, local demand for steel has risen at a time when supplies were reduced by a slowdown in output last year. The result is a surge in output and prices. Yes, there is normally restocking after the Chinese New Year holidays but production levels reached new records in March and the share prices of the larger steelmakers have rallied fiercely.
How long the pick-up will persist is open to question. Idled mills tend to fire up their furnaces when the market shows signs of life and there is little evidence that the sector is addressing its core problem of surplus capacity in an effective way.
Few of the speculators on the commodity exchanges are tracking these fundamentals, however. They only have to pay small deposits on futures contracts, juicing up their returns – a situation that has recently led to trading activity that’s frenetic and very short-term. For example, the average duration that iron ore and steel contracts are held for by ‘investors’ on the Shanghai Futures Exchange is four hours, according to Bloomberg. Chinese investors have been more than ready to try their luck – on the busiest day last month, futures turnover was higher than on the stock markets in Shanghai and Shenzhen combined.
Prices are running red hot because the commodities exchanges are much smaller than the markets for stocks, bonds and properties. That makes the gains more spectacular in an upswing, although the declines will be dramatic if sentiment sours.
No wonder, then, that the authorities are worried about smaller investors getting burned, and as a result transaction fees or margin requirements have now been raised on contracts for steel, iron ore, polypropylene, cotton and coking coal. This week the exchanges also began clamping down on irregularly structured trading activity.
As a result, prices in some of the commodities have come down from their highs. The most traded September contract for iron ore in Dalian fell 4.6% a tonne by lunchtime on Tuesday, for instance, having hit its highest level for nearly two years on the previous day.
Spot prices have also dipped from their recent highs, although most are still trading at their strongest levels for months.
The follow-up question is whether this is a fleeting rally or the start of a longer-lasting trend. Most analysts are opting for the former, predicting that Beijing’s mini-stimulus will last into the summer, but not much beyond. For the guardians of China’s hot money flows, the best trading opportunities may already have passed. No doubt they’ll be looking for where to punt their winnings next.
“The Chinese have always been good at stir-fry cooking and we like stir-frying our investments in just the same way,” warned Ran Xuedong, the editor of China Times, of the speculative conditions.
How appropriate then, according to the Economic Observer, that the price of garlic has more than doubled in the past four months too…
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