Chinese metals prices tumbled on Thursday, dragging down resource prices around the world amid worries that demand for commodities like steel and iron in the world's No. 2 economy is weakening and inventories filling up.
The closely watched price of iron ore traded on the Dalian Commodity Exchange closed down 8%, the daily trading limit, at 485 yuan (US$70.33) a ton, extending losses after a four-day rally was reversed on Wednesday.
In Shanghai trading hours, hot-rolled coil futures also dropped by the daily maximum of 7%, while steel-rebar futures plunged 6.2% to 2,931 yuan a ton, wiping out last week's gains.
Those declines rippled across the world. In London, nickel fell 2.4% to $9,010 a metric ton and copper was down 1.2% to $5,524 a metric ton, a drop that followed the metal's largest one-day decline since 2015.
"The discussion we're having about copper this morning is around tightening liquidity conditions in China," said Bjarne Schieldrop, chief commodities analyst at SEB Markets. China accounts for half the demand for most base metals.
Most metals were taking their cue from iron ore, Mr. Schieldrop said.
Iron-ore and steel rebar prices are down about 20% from four-year highs reached in March. Behind the tumble are fears that expected demand for infrastructure and construction projects in China -- long a pillar of global commodities prices -- may not materialize as expected.
The already weak investor sentiment got a fresh hit on Thursday after six government agencies pledged to curb runaway local-government debt by stricter oversight of the projects they are pumping money into. Many of those projects are private-public partnerships that fund the construction of infrastructure projects such as bridges and dams.
"This is beyond market expectation and exacerbated the correction in iron-ore futures, which was already vulnerable due to a supply-and-demand mismatch," said Ye Yanwu, research director at Shanghai-based Chaos Ternary Futures Co.
Investors had been betting on a pickup in partnership projects to lift demand for iron ore and other commodities, analysts said. But adding to the pressure on metals, supply has been climbing lately amid a sharp increase in imports after China's Lunar New Year holiday in February and increased domestic production since the start of year price rally.
The supply picture became more negative this week with bad news from the London Metal Exchange, whose warehouse inventories across Europe and Asia swelled by 64,000 tons, or 25%, over the course of Wednesday and Thursday, according to Commerzbank research. That reverses most of the 80,000 tons withdrawn from Shanghai Futures Exchange warehouses during April, the bank said. Wednesday's steep declines in copper in New York and London were sparked by inventory numbers.
Investors have become increasingly nervous that the biggest driver of the demand for base metals, the Chinese economy, will slow later this year. Those concerns came following weaker-than-expected manufacturing data released this week, with the nation's factory sector growing at the weakest pace in seven months in April as demand lagged behind.
Meanwhile, tightening financial regulations are adding pressure on the real economy and demand for commodities, analysts say. Chinese leaders recently stepped up their rhetoric on safeguarding financial security, as the ruling Communist Party approaches a key five-year transition this fall.
"Price movements in metals commodities are still largely driven by speculation, which has been hit hard by the central government's repeated calls for financial deleveraging," said Fan Qingtian, an analyst at Nanhua Futures Co.
"I don't think that the risks have been fully squeezed out and commodities may head down further," he said, adding that investors should stay cautious due to uncertainties over the extent of production capacity cuts of metals in the country.
The fall in metal prices dragged down the shares of those who mine them. Glencore PLC was down 2.8%, Rio Tinto PLC fell 1.9% and Vedanta Resources PLC was down 5.3%.
Precious metals were also lower on Thursday, mainly as concerns over geopolitical risk subside, analysts said.
"The market is quick to forget what actually took the price higher in the first place, namely Syria, North Korea, and the overall Trump presidency.... none of these things have gone away," said David Govett, at Marex Spectron.
Gold traders will be looking to Friday's U.S. nonfarm payrolls jobs data for signals about Federal Reserve interest-rate increases, but will also be monitoring the final round of Sunday's French presidential election, in case that raises further political risk.
Among precious metals, silver eased 0.6% to $16.35 a troy ounce, platinum slipped 0.1% to $869.45 a troy ounce, and palladium dropped 1.1% to $791.18 a troy ounce.
-- Yifan Xie and David Hodari