Chinese steel futures prices fell sharply on Tuesday as commodities optimism faded. As speculators begin to flee the futures market, this could become a significant drag on physical spot prices, Kallanish notes.

The October rebar contract on the Shanghai Futures Exchange closed down CNY 101/tonne at CNY 2,554/t ($393/t), while the same contract for hot rolled coil closed down CNY 172/t at CNY 2,685/t.

The volume traded of the October rebar contract was down another -30% from Monday to 13.8 million lots, compared to 22.4m at its peak last Thursday. Exchanges have hiked trading costs to avoid speculators from overheating the market.

The rising futures’ tide was also lifting spot market prices however. Spot traders were lifting their offers every time there was an increase in futures prices. Now they will be under pressure to cut their prices as futures prices slump.

Traders have also reported ever slower rates of buying, suggesting demand may not be able to support current prices. With the seasonal uptick in demand expected to continue for around another month, there could be support at lower prices. Even this should not be taken for granted however as rocketing demand in March was largely due to demand brought forward from later in the year.