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Commodities

China warns of punishment for commodity speculators

Iron ore, copper and aluminum prices under pressure

HONG KONG -- China has responded to the red-hot demand for commodities such as iron ore and copper by vowing to punish speculation, market manipulation and spread of false information, sparking a fall in the price of the key raw materials.

China is the largest consumer of commodities such as iron ore and copper, which have surged in price this year as the global economic recovery reignited demand for an array of manufactured goods. However, the upward pressure on prices has led to fears of higher global inflation, which could in turn threaten the economic revival.

The National Development and Reform Commission, China's top economic planner, and four other regulators summoned the nation's top metals producers on Sunday and directed them not to drive up prices for copper, coal, steel and iron ore.

Authorities will "strengthen the joint supervision of commodity futures and the spot market" and show "zero tolerance" toward "malicious speculation," such as price collusion, spreading false information, hoarding and other illegal activities, the NDRC said in a statement on Monday.

After the announcement, metal prices in China's commodity exchanges slumped. The most-traded Dalian iron ore futures dropped as much as 9.5%, just short of the 10% daily limit. Copper and aluminum futures in Shanghai dropped over 2% and 4%, respectively.

The move on Monday follows a statement by China's cabinet on Wednesday, which said the government would manage unreasonable price increases.

Chinese authorities last month began warning about rising raw material prices, which contributed to the sharpest rise in three years -- 6.8% -- in the country's producer price index (PPI), or so-called factory gate prices, in April.

At the meeting on Sunday, officials representing companies in iron ore, steel, copper and aluminum were told the surge in commodity prices was caused by a combination of factors, including "excessive domestic speculation," which have disturbed normal market price discovery.

"Normal production and sales" in China's metal industry have already been disrupted, which drove up prices, the NDRC warned in the statement.

Higher raw material prices have helped companies such as miners and refiners while hurting downstream producers such as specialty steelmakers, infrastructure companies and even hi-tech producers such as chipmakers.

"High commodity prices negatively impact the Chinese's economy, especially the industrial sector. As we understand it, some thermal power plants in Guangdong and Guangxi province are to cut power generation in May due to high coal prices," Yanting Zhou, senior economist at Wood Mackenzie, said. "Many factories in Guangdong, a main manufacturing hub in China, have [had] to shift production schedule due to limited power supply [while] the strong copper price has also resulted in cash flow issues and production cuts for copper consumers."

Companies absorbed cost increases for months but as demand recovered they have been better able to push these rises onto consumers, adding to global inflation pressure.

"Commodities have been used as collateral multiple times for leverage, worrying regulators," said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis. "Increasing commodity prices onshore are feeding inflation, and this is a worry as household disposable income is not back to pre-COVID levels. China does not want to end with an inflation scare like the U.S., especially as China's central bank is trying to avoid rate hikes."

Inflation in the U.S., which underpins the Federal Reserve's setting of interest rates, in April rose by the most since 2009 -- spooking investors who fear continued inflation pressures will force central banks around the world to tighten policy quicker than expected.

Additional reporting by Cora Zhu in Hong Kong

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