The mystery deepens: China’s slowing economy and gravity-defying commodities futures rally

Futures contracts of iron ore and coke surged to their daily limits again on Friday, defying the Chinese authorities’ cooling measures in the commodities markets, which have begun to show signs of the uncontrolled frenzy that gripped the stock markets before they went belly up last summer.

The most actively traded iron ore futures contract on the Dalian Commodities Exchange (DCE) finished up 5.96 per cent, hitting the daily ceiling, mirroring a similar movement in coke futures. Rebar futures on the Shanghai Futures Exchange, meanwhile, jumped nearly 3 per cent.

Chinese authorities have been trying in vain to rein in the unbridled speculation on these futures products this week. The DCE raised the transaction fee for iron ore three times in three days while other commodity futures exchanges have also raised transaction fees and minimum margin requirements.

But save a brief correction earlier this week, the rally remains unstoppable, much to the amazement of global investors perplexed by the inexplicable surge. With the economy slowing and no solid stimulus measure from the Chinese government, which is trying to cut overcapacity in industries such as steel and mining, commodities prices should logically head south rather than north.

But at their peak this year, Dalian iron ore had risen 73 per cent and Shanghai rebar, 62 per cent. On some days, the trading volume in iron ore futures on the DCE exceeded China’s total imports for the whole of last year, according to Reuters.

Many institutional and retail investors withdrew from the sluggish Chinese stock market early this year and piled into commodities futures for quick returns, driving up contracts, including those of iron ore, coke and coking coal, rebar, cotton, and even eggs.