(The opinions expressed here are those of the author, a columnist for Reuters.)
Anyone betting that the rally in China's steel and iron ore prices is going to continue unabated can't say they haven't been warned.
The threat isn't explicit, but the signs are mounting that the authorities in Beijing are growing increasingly concerned about the strength in one of the economy's key sectors.
In the past this sort of concern has translated into actions to cool markets, such as tighter trading rules on China's domestic exchanges, increased regulation (or the threat thereof) and a ramping up of what could be described as jawboning by officials.
The problem is simple, the benchmark Shanghai steel rebar future SRBcv1 has surged 56 percent since the end of last year to close on Thursday of 3,969 yuan ($598) a tonne, while spot iron ore .IO62-CNO=MB has jumped 44 percent since its low this year on June 13 to close at $76.68 a tonne on Thursday.
Steel rebar is now at a 4-1/2-year high, while iron ore has doubled since December 2015, when it dropped to $38.30 a tonne, the lowest recorded since Metal Bulletin spot price assessments started in 2008.
It appears that the Chinese authorities don't believe the current rally in steel and iron ore is justified by fundamentals, prompting meetings this week by industry participants.
The China Iron and Steel Association (CISA) held a meeting on Wednesday with its members, and a meeting hosted by the government's National Development and Reform Commission was scheduled for Thursday.
CISA said after its talks on Wednesday, which included representatives of steel companies, brokerages and consultancies, that the recent rally was "speculative" and was "not driven by market demand or reduced market supply."
The association also said that some market players were "misreading" the likely impact of measures to idle some steel-making capacity in the second half of this year as part of efforts to limit pollution.
In what could be the opening salvo of measures to calm the rally, the Shanghai Futures Exchange has told its members it may raise margins on steel rebar futures contracts if turnover is too high, Reuters reported on Friday, citing three sources familiar with the matter.
FUNDAMENTALS VERSUS FROTH Fears of production restrictions in the second half of 2017 have provided a reason for price gains, as well as fuelling near record steel production and strong gains in imports of iron ore.
Steel mills in the smog-prone northern province of Hebei, which surrounds the capital Beijing, will be forced to halt operations next month if they fail to meet tough new pollution restrictions, the local government said in a notice on Wednesday.
The province produces about a quarter of China's steel and has been leading efforts to reduce excess capacity in the industry.
It's also been the case that demand for steel appears to be strong, with rebar inventories monitored by Shanghai Steelhome SH-TOT-RBARINV at 3.8 million tonnes in the week to Aug. 4, up slightly from the recent low of 3.7 million from July 14, but less than half of the recent peak of 8.4 million from early February.
Declining steel inventories contrast with rising port stocks of iron ore SH-TOT-IRONINV , which stood at 139 million tonnes in the week to Aug. 4, close to the record high of 141 million reached in late June.
While there are fundamental reasons behind the rally in steel and iron, the question becomes how much of the price gains can be attributed to speculative froth.
This will always be a matter of opinion, but the Shanghai rebar futures relative strength indicator (RSI) provides a technical view that the price may be somewhat overcooked.
It currently stands at 82.57, which is well above the 70-mark that indicates when a contract is in overbought territory.
The RSI reached a peak of 90.6 in November last year, before dropping to just below the 30-level that indicates oversold territory in April this year, just as the price rally started.
While calling an end to a rally is always fraught, it does appear that the China steel story is ripe for a change in narrative, especially if the authorities take actions to back up their seeming displeasure at the strength of the recent gains.
COLUMN-You have been warned. Risks mount for China steel, iron ore: Russell
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