Commodity futures hit by concerns, weak demand

China's commodities futures plunged on Monday, with steel and iron ore futures falling by 6 percent, as worries about the country's economic outlook and weak demand further intensified. Analysts also said there was no basis for the previous increases in commodity prices, and that the fall in prices will continue. The most-traded steel rebar contract on the Shanghai Futures Exchange (SHFE) fell around 6 percent to 2,175 yuan ($334.30) a ton on Monday, the lowest level since April 7. A similar trend was seen on the Dalian Commodity Exchange (DCE) on Monday. The September iron ore futures contract on the exchange plunged by the daily maximum of 6 percent to 388 yuan a ton by close of trading. Coking coal, another major commodity, fell 5.76 percent to 654 yuan a ton on Monday. Aluminum and copper on the SHFE both shed over 2 percent on Monday, while asphalt and nickel dropped by more than 3 percent. "There is no basis for commodity prices to rise," said Qiu Yanying, partner and chief strategist at VStone Asset Management Co. "The previous jump in prices was largely caused by speculative activity, and prices are bound to fall back to the original level," Qiu told the Global Times on Monday. Steel futures prices have seen a cumulative increase of around 47 percent so far this year as of April 25, National Business Daily reported, noting that iron ore futures also surged by 48 percent this year, hitting a 15-month high. Multiple reasons for the plunge "The recent launch of aggressive regulatory policies also helped cool the market by increasing the cost of speculation," Jiang Shu, chief analyst at Shandong Gold Group in Shanghai, told the Global Times on Monday. In recent weeks, China's commodity exchanges launched a series of measures, including raising the minimum trading margin, to tackle signs of overheating transactions. A spokesman for DCE said on Monday that the exchange will continue to strengthen market monitoring and will take measures to restrain excessive speculation, such as raising transaction fees for frequent and short-term trading, according to a post on DCE's website on Monday. The policies appear to have had an effect. Last week, coke, coking coal and rebar futures all saw their largest weekly decline on record, plunging 11.11 percent, 10.21 percent and 9.46 percent, respectively. But in Jiang's view, the most important reason for Monday's plunge is concerns about China's economy. "Unlike oil, the performance of ferrous metals is mainly based on the domestic economy rather than international market conditions," Jiang said, adding that a report by People's Daily on Monday added to investors' fears about the economy. China's economic trend will be "L-shaped," and cannot be U-shaped, and certainly not V-shaped, the People's Daily report said, citing an "authoritative figure." The source also said that the Chinese government will continue cutting capacity and inventories, and will not use excessive investment and credit expansion to stimulate the economy. "This shows the central government's view of the economy, and that slower GDP growth [will persist] for quite some time," Jiang said, noting that demand will also remain weak. Many analysts attributed the previous jump in trading volumes and prices of China's commodities to a massive influx of speculative funds. But according to Jiang, the plunge on Monday was not solely due to an outflow of speculative funds from the market. "Some funds did leave the market to take profits, but there were also some new funds flowing into the market for bargain-hunting," Jiang said. As for future prices, Qiu from VStone said there will be a prolonged drop in steel and iron ore prices in the long term, due to the sluggish demand and tighter regulations. "But in the short term, there will still be some volatility since trading behavior is easily affected by various factors such as changes in transaction fees," Qiu said.