China's Commodity Exchanges Move To Cool Iron Ore, Steel Prices As Supply Squeeze Fuels Global Rally

Efforts to temper gains in prices of iron ore, steel futures have so far failed to restrain a rally to new highs China is the world's biggest importer of iron ore and producer of steel, according to official data
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China's Commodity Exchanges Move To Cool Iron Ore, Steel Prices As Supply Squeeze Fuels Global Rally

China has called for greater risk controls among commodity futures traders after overnight measures to cool rapid run-ups that sent contracts on iron ore to steel to record highs amid a global supply squeeze.

The Dalian Commodity Exchange raised the margin requirement and widened the daily trading band for iron ore contracts starting Tuesday, without giving specific numbers, according to a statement posted its website late on Monday.

The Shanghai Futures Exchange also on the same day raised trading costs by reinstating fees for closing positions on contracts linked to steel rebar and hot-rolled coils at 0.01 per cent of transaction value, according to a statement on its website.

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The move is sending a clear message that China's market watchdog is paying close attention to gyrations in global commodity prices fanned by supply bottlenecks amid a wider reopening in major global economies. Apart from steel materials, copper also surged to a record in the US while a ransomware attack on US pipeline operator Colonial Pipeline spurred a rally in crude.

"There are lots of uncertain factors affecting market operations and commodity prices, particularly coking coal and iron ore, resulting in wild swings," the Dalian exchange said. "Market players should participate rationally to guard against risks and ensure smooth functioning of the market."

The cooling measures, however, have failed to restrain the rally, with prices reaching fresh all-time highs on Tuesday. The most active contracts on iron ore gained 0.4 per cent to 1,290.5 yuan per ton, while those on rebar and hot-rolled coils rose at least 3 per cent in Shanghai. Prices of copper, iron ore and steel rebar have surged by 86 to 113 per cent in US dollar terms over the past 12 months, according to Bloomberg data.

Rising commodity prices have compounded the outlook of global monetary policies, even as the Federal Reserve has reiterated its accommodative policies will stay for an extended period of time. Faster inflation, however, could prompt policymakers to put a brake on liquidity to prevent it from derailing recovery.

China's producer inflation accelerated to 6.6 per cent in April, the fastest pace in more than three years, the statistics bureau said on Tuesday morning.

"Commodity prices may be in for the risk of a pullback in the short term," said Wang Yang, an analyst at Donghai Securities.

China imported a record 1.17 billion tons of iron ore last year, while production of steel increased 7.7 per cent from a year earlier to 1.33 billion tons, according to official data, making it the top buyer and producer worldwide.

Local regulators overseeing the futures market should promote high-quality development in trading to better serve the real economy, according to Fang Xinghai, vice-chairman of the China Securities Regulatory Commission.

"The futures industry should firmly grasp the new development opportunities, increase the internationalisation process and improve China's global pricing influence in the commodity market," he said.

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