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China commodities pause after frenzied buying from steel to soybeans

[MANILA] Commodities futures in China from steel to soybeans pulled back on Monday after exchanges stepped in to cool speculative buying that has bloated trading volumes, lifted prices to multi-month highs and raised concerns of a dangerous bubble.

The rally in some futures continued, with steelmaking raw materials coking coal and coke surging by their 6 per cent limit, though analysts warn the fundamentals for the underlying commodities remain weak.

China's top two commodities bourses - the Dalian Commodity Exchange and Shanghai Futures Exchange - raised transaction costs on some futures products from Monday in a bid to restore calm.

Shanghai rebar steel futures are up more than 50 per cent so far in 2016 after six straight years of losses, while Dalian iron ore futures have risen more than 60 per cent.

China's Zhengzhou Commodity Exchange will also raise the margin on some futures contracts, including cotton, from Tuesday.

Analysts said the run-up appeared to be fuelled by an influx of speculative buying from investors who have been moving out of Chinese equities since a bull run ended in a crash that has knocked 40 per cent off shares since last summer.

Some fear the commodities market could follow a similar boom-and-bust pattern. "Retail investors' entry into these markets has created a bubble, and we could see this collapse in the same way as we saw in the A-share market last year," said Chen Li, China strategist at Credit Suisse.

Monday's pullback was led by rebar - or reinforcing bar used in construction - on the Shanghai Futures Exchange, where turnover on a single contract last Thursday was nearly 50 per cent more than the total value traded on the Shanghai Stock Exchange.

The most traded Shanghai rebar contract closed 0.3 per cent lower at 2,643 yuan a tonne on Monday. The benchmark soybean contract on the Dalian Commodity Exchange dropped 1.6 per cent to 3,702 yuan a tonne.

The benchmark rebar futures contract had seen around 303 billion yuan (S$64 billion) in trade value by Thursday's close, based on a record 111.8 million tonnes changing hands, based on the settlement price of 2,708 yuan per tonne.

That compares with around 209 billion yuan of trade on the Shanghai Stock Exchange the same day.

Li said transaction volumes in the Shanghai, Dalian and Zhengzhou futures markets have tripled since last year for some commodities, leading to a big disconnect between futures and physical prices. "This is happening in commodities like rubber and steel, which don't have a high linkage to the global market. Retail investors are too small to influence gold and copper markets," said Li.