Chinese commodity futures are tanking, including iron ore

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Chinese commodity futures are tanking in early trade on Monday, including iron ore.

An hour after the market opened, the most actively traded September 2016 iron ore contract on the Dalian Commodities Exchange has fallen by 4.73%, reversing a gain of more than 3% in overnight trade on Friday evening.

That’s a huge reversal in anyone’s language.

The price action in ore is being mirrored in Chinese rebar and coking coal futures, which have also fallen by 5.79% and 4.51% respectively.

According to Reuters, the Dalian Commodity Exchange said on Monday it would continue to strengthen its market monitoring and may raise transaction fees further to curb speculation risks.

In response to a surge in speculative activity seen in recent months, the Shanghai Futures Exchange increased transaction fees in late April while the Dalian Commodity Exchange raised margin requirements and tightened rules on what it called “abnormal trading”.

Be it rebar, coking coal or iron ore futures, movements in excess of 3, 4 or 5% are now commonplace every day in China, leaving it at the point where it’s strange, rather than normal, when the movements are anything smaller.

According to analysis from Vivek Dhar, a mining and energy commodities analyst at CBA, the average tenure of an iron ore futures contract on the Dalian Commodity Exchange is now under 4 hours, similar to a steel rebar futures contract on the Shanghai Futures Exchange. This compares with 40 hours for WTI crude, 60 hours for copper and 70 hours for natural gas.

“A lower average tenure suggests increased speculation and helps explain the significant volatility in China’s commodity markets recently,” says Dhar.

The excellent chart below, supplied by Westpac’s head of market strategy Robert Rennie, takes what Dhar is saying one step further, looking at the average position tenure for not only Dalian iron ore but also other key Chinese commodity futures.

The left hand side of the chart — indicating shorter periods that a position is held on average — is dominated by Chinese commodity futures.

As a result of the abrupt turnaround in Chinese bulk commodity futures on Monday, the ASX 200 materials index is now trading down 0.97% having been up as much as 1.4% earlier in the session.

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