For the commodity bulls out there, the past few months have been rollicking fun.
Coking coal prices have tripled since mid-year and iron ore has doubled since January.
However, in the past week or so, the news flow has turned somewhat negative.
Iron ore and coking coal futures have endured some stunning reversals — iron ore falling 8 per cent on Wednesday alone — as speculators took their profits and ran.
Dalian iron ore futures slipped another 2 per cent in morning trade today.
Cracks have also appeared in steel with prices for the internationally traded hot-rolled coil product falling for the first time in seven weeks, a sentiment further undermined by tumbling domestic Chinese HRC prices.
Weekly data from the China Iron and Steel Association shows production fell again — down 1 per cent since the start of the month.
That prompted Macquarie analysts to point out that with “Chinese steel output falling, current iron ore price levels look ever more elevated compared to fundamentals”.
The respected coal market report put out by McCloskey’s noted major Chinese generators are beginning to close their books for spot thermal coal imports in anticipation of supply and demand falling back into balance shortly.
Thermal coal prices out of Newcastle have slipped noticeably in the past week in response.
In copper, Reuters reported a survey of major producers and traders found global markets could be oversupplied for at least two years, casting doubt on the long-term sustainability of the current rally.
Copper futures in Shanghai have shot up 20 per cent in a month, but have rolled over since hitting an almost 18-month peak on Monday.
Analysts at big broking houses have also churned out cautionary notes pointing to the fact current high prices would naturally spur producers on to boost supplies resulting in a steady decline in prices through next year.
Chinese authorities likely to crack down on speculation
Deutsche Bank mining analyst Paul Young said in the very short-term prices are not sustainable because they’ve been driven up by Chinese speculators, something that has not gone unnoticed by regulators.
“We would expect the authorities to cool trading activity down with higher fees and margins,” Mr Young said in a note to clients.
“In our view, that last spike up in pricing has been driven by financial interest and speculation, and that these current prices are unsustainable for any length of time,” he said.
While trading volumes on Chinese futures exchanges have hit record levels, the open interest — or the total number of outstanding contracts held by traders at the end of the day — have fallen sharply.
“This indicates that the average position is of a fairly short duration, a sure sign that speculation has risen,” Mr Young said.
“In an attempt to quell the degree of speculation, we have already noted increasing fees and increasing margin limits, which will in all likelihood take the sting out of pricing over the rest of 2016.”
Looking into next year, the Deutsche Bank house view is not so rosy with expectations Chinese credit will be tightened again, hitting first the property sector and perhaps flowing into infrastructure further down the track.
“The structural trends of slowing urbanisation and ageing demographics will continue to be a headwind for the remainder of this decade,” Mr Young said.
“Furthermore, the favourable pricing environment in 2017 with prices well above the marginal cost (of production) will likely entice more supply back into the market.”
If there is a silver lining in the gather commodity cloud, Mr Young noted prices are unlikely to test the lows of earlier this year as a degree of inflation has crept into the metals market and is likely to hang around for some time yet.