China is becoming a nation of iron ore traders

Photo by Kevin Frayer/Getty Images

With the stock market in a funk and property prices rising so fast that some investors are losing sleep, it appears that an increasing number of Chinese are turning to iron ore futures trading to make their next fortune.

The chart below, from Westpac’s head of market strategy, Robert Rennie, shows the daily traded volume of Chinese iron ore futures on the Dalian Commodities Exchange going back to late 2013.

It’s even more amazing than the record-breaking surge in the spot price earlier this week.

According to Rennie, the equivalent of 977 million tonnes were traded on the Dalian exchange on Wednesday. Not only was it the highest daily turnover on record, it exceeded the entire amount of physical iron ore imported by China over the past year.

In the 12 months to February, China imported a total of 962.6 million tonnes of ore, the largest year-on-year total on record.

If the level of turnover recorded in Dalian futures on Wednesday was to be replicated over the course of any one typical trading year, it would equate to around 240 billion tonnes of ore.

That’s a lot of ore!

The surge led Sean Callow, currency strategist at Westpac, to muse earlier today whether iron ore futures are the next “new new thing” for Shanghai cab drivers having dabbled in the stock market beforehand.

Certainly the swings in iron ore futures have been wild of late, suggesting that speculative forces may be building, as was case in the stock market back in late 2014.

Whoever is responsible, be it taxi drivers or other investors, let’s hope that they’re aware that iron ore futures are a physically delivered contract, meaning when it expires those who are holding will take physical delivery of the ore.

That could be an awkward situation to explain to your next door neighbour.

Midway through Thursday’s trading session the most actively traded May 2016 contract in Dalian is currently up by 4.04%.

Whether that’s a sign of strong underlying demand, or simply speculation that the gains in the spot price earlier in the week will continue in the days ahead, won’t be truly known until daily spot price data is released at 9.30pm AEDT tonight.

You can follow both Robert and Sean on Twitter.

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