Inside The “Wildest Commodity Trade” Ever… Just Don't Blink
Besides the hilariously fabricated economic data and the whole central planning bit – both of which are now everywhere these days – the one most notable feature about China’s economy and capital markets are the constantly rolling, bursting and resurrecting asset bubbles: from housing, to stocks, to bonds, to commodities, to cryptocurrencies, to pretty much anything that isn’t nailed down and can be traded, and back to housing again, the lifecycle of a Chinese assets is best expressed in terms of its “tulipness”: how long before the swarming horde of Chinese bubble-chasers, armed with over $35 trillion in closed-capital account credit, latches on, bids it to the stratosphere, then sends it crashing only to repeat the cycle from scratch. And since these bubbles come ever faster and ever more furious, one has to be lightning fast to get in (and out) before it’s all over.
One such place where “if you blink, you missed it” is China’s Zhengzhou Commodity Exchange, the location of what Bloomberg has called China’s “wildest commodity trade” du jour: the buying, and selling, but mostly buying (for now) of ferrosilicon contracts. Trading in futures of the little known commodity – an alloy used to harden steel – exploded this week, as humans became veritable HFT vacuum tubes, with the average contract on Wednesday held for an estimated 39 minutes, according to Bloomberg calculations, as “investors” scrambled to buy just so they could immediately flip it to another greater fool.
And as the chart below shows, a whole lot of greater fools suddenly emerged at the start of the month.
Incidentally, the tenure of oil contracts on the NYMEX is an ancient 47 hours.
As Bloomberg’s Alfred Cang reports, “Ferrosilicon is just the latest commodity contract pounced on by China’s hordes of speculators with an intensity that makes the world’s most liquid markets look leisurely. In repeated bouts of manic trading over the past year, they’ve piled in and out of everything from cotton to zinc, eventually prompting regulators to step in and calm the frenzy.”
Of course, the second regulators “step in” to burst one bubble, the same hordes of speculators immediately shift to another, similar asset, which then becomes the next bubble du jour, and in recent days the choice has been a “hot potato” between the alloy, rebar, iron ore, siliconmanganese, and various other commodities, all of which are traded not with the intention of actually holding on to the asset, but selling it as soon as possible at a higher price, before the whole house of cards comes crashing down.
“There are large volumes of short-term investment in steel and related products such as rebar, iron ore and ferroalloy futures with investors trading momentum and sentiment,” Wei Lai, an analyst at COFCO Futures in Shanghai, said by phone.
For regular followers of China’s “investing” habits, none of the above should come as a surprise. What is surprising, is that this particular bubble hasn’t burst just yet: trading in ferrosilicon peaked on Wednesday with more than 705,000 contracts changing hands. Prices surged to a record $7,726 yuan a metric ton the previous day, up 25% this month (a move which in all honesty is tame when compared what ethereum and bitcoin have done this year).
What is also surprising, is the viciousness with which the bubble hunters swarmed this particular asset: until August, it was one of the quieter contracts on the exchange, with 22,000 contracts trading daily on average in July. Then China’s trading hordes arrived…
A spokeswoman for the exchange declined to comment to Bloomberg on the market movements: after all what can they possible say – “we keep getting overrun by an army of momo housewives”?
Overall, trading in steel and iron ore is the heaviest on China’s three commodity bourses, with volumes that dwarf contracts such as ferrosilicon. An average 7.9 million steel reinforcement bar futures traded on the Shanghai Commodity Exchange in July. Earlier this month, the bourse hiked fees and margins to calm trade in rebar after prices ran up to the highest in four years on speculation that China’s supply-side reforms are creating a shortage, and to cool the latest bubble mania. It failed.
For those curious how to calculate this particular metric, which for lack of a better phrase, we dub “bubble momentum” and bloomberg calls “commodity churnover”, here is the answer:
Analysis of aggregate open interest, volumes and trading hours illustrates the extraordinary pace at which Chinese investors are trading commodities futures.
Dividing the average aggregate open interest at the end of each day by the aggregate volume shows the number of futures traded for every outstanding contract. Multiply that ratio by the number of hours in each trading day and you get an estimate for the average tenure of each contract. While Wednesday’s ferrosilicon contracts were held for less than an hour, the average for the month is 3.6 hours. Futures in Siliconmanganese, another alloy used in steel production, change hands at the fastest pace, with an average tenure in August of 2.7 hours. Iron ore is about 3.8 hours on average and rebar is 4.3 hours.
The best thing about China’s bubble factory: once the locals tire of high-frequency trading ferrosilicon, or whatever is the high speed bubble du jour, they can just move on to the next one and do it all over again.