Steel and iron-ore futures traded in China have gone into sharp decline, reversing a huge run-up in recent weeks caused by a flood of speculative money into these hitherto little-watched markets.

Prices for the commodities tumbled for a sixth consecutive day on Tuesday, wiping out much of their recent rally, on expectations of more cooling measures from regulators and rising stockpiles that reignited concerns about a growing global glut.

Rocketing appetite from local funds in recent months transformed China’s steel and iron-ore futures into two of the most traded commodity contracts globally—a rush reminiscent of that in the country’s stock markets last year. Speculative trading was facilitated by easier credit flows that were intended to prop up China’s slowing economy.

But brokers including Goldman Sachs and miners such as Rio Tinto Ltd. cautioned that the surge in speculative commodities trading appeared excessive, and the price rally looked unsustainable.

 

At their peak, futures prices surged by more than 50% from the start of the year, and turnover in iron-ore futures was last month double what was recorded just two months earlier.

Analysts say measures by exchange officials designed to quell the frenzy, including higher fees for traders, triggered the retreat.

In late April, the Shanghai Futures Exchange and the Dalian Commodity Exchange raised the amount investors must deposit to trade commodities—known as a margin requirement—on iron ore, hot-rolled coil and steel rebar. The price rally unwound further beginning Monday, when market regulators signaled they would take fresh steps to discourage speculation.

Steel rebar on the Shanghai Futures Exchange is down 22% from its April 21 peak. Iron ore, which is traded on China’s Dalian Commodity Exchange, has slumped 19% over the same period.

Daily trading volumes have more than halved.

As the futures trading cools, focus is switching back to supply and demand—so-called fundamental drivers—in two markets that are awash with supplies, analysts say. As recently as December, iron ore was trading at a decade low because of concerns miners were producing too much of the raw material.

“The sentiment on the spot market has returned to a stage of [the] extreme pessimism before the rally,” said Fan Qingtian, an analyst at Nanhua Futures.

The selloff in China has stung the stocks of Rio Tinto and BHP Billiton Ltd., the world’s second and third top iron-ore suppliers, respectively. Prices for their physical cargoes of ore have been increasingly influenced by futures markets this year as the surge in Chinese speculation became impossible to ignore.

In Australia Tuesday, investors dumped shares in big miners: BHP Billiton, the world’s biggest mining company by market value, tumbled as much as 5.3% during the day to a one-month low. Rio Tinto fell as much as 5%, while Fortescue Metals Group Ltd.—the world’s No. 4 exporter of the commodity—dropped 7.6%.

China’s steel rebar price was last down 6.4%, at 2,112 yuan ($323.69) a metric ton, while iron ore was down 5.3% at 382.5 yuan ($58.62) a ton.

Despite Fortescue benefiting from the earlier lift in prices, chief executive Nev Powerrecently encouraged exchange officials to keep the markets in check, saying the huge swings in prices weren’t good for miners or their customers.

Rio Tinto Chief Executive Sam Walsh said last week that trading on the Dalian exchange had become “the wild card” in the iron-ore market. He said recent price falls reflected the slowdown in parts of China’s economy.

Recent factory data has been soft. Steel is used heavily in manufacturing and construction, and iron ore is the key ingredient in steel.

A report published in China’s state-run People’s Daily newspaper, citing an “authoritative” person as saying that China’s economic growth trend would be “L-shaped” rather than “U-shaped” or “V-shaped,” also stoked fears about the outlook for the economy.

Concerns have re-emerged about a glut of iron ore that could take years to clear.

Although the recent rally in steel prices prompted steelmakers, who were enjoying higher profitability, to boost their inventories of the raw material, some analysts say they purchased more than they needed.

Stockpiles of iron ore at key Chinese ports—a closely watched indicator for demand—are now up almost 10% from the start of the year, at more than 100 million tons, according to consulting firm MySteel.

“The demand for iron ore is less than actual supply,” says Helen Lau, analyst at Argonaut Securities. “The overall inventories are quite high.”

—Yifan Xie in Shanghai contributed to this article.

Source: THE WALL STREET JOURNAL