Chinese Steel Now Cheaper than Cabbage

A sudden collapse in Chinese equities is hammering commodity markets, piling fresh pressure on mining stocks, already sitting at multi-year lows.

The Shanghai stock exchange has lost 32 per cent in less than a month, knocking $3.5 trillion dollars off the value of Chinese companies since early June. Commodities have also gone into a tailspin, with iron ore suffering its worst one-day drop on record. Copper has fallen 15 per cent in five weeks, whilst steel is now cheaper than cabbage on a per tonne basis in China.

The share market sell-off follows a parabolic rise in prices, meaning indices remain well above levels a year ago, but the extreme volatility has only added weight to fears of a bursting credit bubble in China.

So far, state-backed intervention has failed to stem the collapse. A group of Chinese brokerages poured 120bn yuan, equal to around $20bn, into a share buying fund designed to stabilise the market over the weekend, whilst China Securities Finance Corp., a state-backed financing company, is seeking 500bn yuan from banks and state bodies, equal to more than $80bn, to help prop-up share prices.

Equities however have continued the sell-off, which now ranks as the country’s worst in more than 20 years, with Shanghai down 5.9 per cent on Tuesday night.

“Seriously Nasty”

Chinese equities are known for their volatility, but analysts and mining investors are increasingly concerned that the falls reflect a “seriously nasty hard-landing” in China, which guzzles nearly 50 per cent of the world’s copper and two-thirds of its iron ore.

“Even when you see it coming, it still smacks you right in the face,” according to analysts at Investec, who estimate that Chinese stocks are around three times more over-priced than equities in Japan or the US.

Investors are also increasingly concerned that what is currently a stock market crisis could spill over into the real economy. Everything from rubber futures to eggs have begun falling in Shanghai, as traders dash for liquidity and scramble to meet margin calls. An alarming 43 per cent of all China-listed companies have meanwhile asked for their shares to be voluntarily suspended, reportedly to avoid directors defaulting on personal loans secured against their equity holdings.

Metals that are widely used as collateral against loans in China have also been caught in the crossfire, appearing to explain why gold has failed to react positively to Greece’s looming exit from the Eurozone.

Copper is now trading at its lowest level since 2009, whilst nickel and zinc have both entered bear market territory. Iron ore is down a staggering 25 per cent in 18 days, abruptly ending a short-lived rally, whilst the price of steel rebar futures, which have pre-empted iron ore’s moves in recent months, have hit record lows.

Unsurprisingly, the falls have fed through directly to big-cap mining stocks. Glencore, which is dominant in copper and zinc, lost 6.9 per cent on Tuesday, whilst Rio Tinto and BHP Billiton are down by 9 to 12 per cent in the last month.

Anglo American has been the hardest hit, dropping to its lowest level for nearly 15 years.