China’s Record Steel Punts Show Risks for Market’s Bull Run

Posted on 06 July 2017
 

Source: Bloomberg

 China’s army of commodities investors has racked up an unprecedented volume of bets on steel futures, raising the prospect of a sharp retreat if market conditions weaken.

Open interest on the Shanghai Futures Exchange’s steel reinforcement bar contract surged to a record 2.82 million lots on Monday, according to bourse data, with each lot representing 10 metric tons of metal. That’s more than double the level at the start of the year, with investors piling up positions in the past two weeks as prices rallied amid renewed optimism on demand. Rebar’s benchmark October contract returned to a bull market on Monday after rising more than 20 percent from this year’s low in mid-April.

“There has been quite a lot of money flowing into rebar futures recently, and prices are very volatile amid big market uncertainties,” Li Xiaodong, an analyst at Nanhua Futures Ltd., said by phone from Hangzhou. “The market is very divided, and whenever the bulls or the bears start unwinding their positions, prices could go wildly in either direction.”

Rebar, a common product used in construction, has rallied with other steels on bets that a more stable economy in China will prop up consumption. The country’s official steel purchasing managers index expanded for a second month in June, amid signs that the government deleveraging campaign that had rattled commodities markets may be easing. Steel inventories have also thinned out, with rebar stockpiles languishing near their lowest since December, according to consultancy Shanghai Steelhome E-Commerce Co.

Rebar closed 1.8 percent higher on Wednesday at 3,420 yuan a ton, the highest since March 17. Aggregate open interest also rebounded after a dip on Tuesday, to about 2.75 million lots. China produced 202 million tons of rebar last year, according to Beijing Antaike Information Development Co.

The futures rally has outpaced increases in the physical market, prompting some analysts to warn that market conditions don’t justify the recent advance. “We don’t really understand the logic behind this rally from a fundamental point of view,” Richard Lu, a CRU Group steel analyst in Beijing, said by phone. “We do think prices will reach a turning point soon, and the fundamentals will take hold. We still don’t see any substantial support for steel prices.”



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