Chinese metals prices tumbled on Thursday amid increasing worries that demand for commodities like steel and iron in the world's No. 2 economy is weakening.
The closely watched price of iron-ore traded on the Dalian Commodity Exchange closed down 8%, the daily trading limit, at 485 yuan (US$70.32) a ton, extending losses after a four-day rally was reversed on Wednesday.
In Shanghai, hot-rolled coil futures also dropped by the daily maximum of 7%, while steel-rebar futures plunged 6.2% at 2,931 yuan a ton, wiping out last week's gains.
The bearish mood in metals spilled over to other chemical and energy commodities, with coking-coal falling 6% and methanol prices declining 5%.
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 like 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. Supply of metals has been climbing of late amid a sharp increase in imports after China's Lunar New Year holiday in February and increased domestic production since in the start of year price rally.
Also driving the current weakness in metals prices are rising concerns over China's economic prospects later this year, 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.
Thursday's price correction in Chinese metals prices came as copper prices in the U.S. staged their biggest one-day percentage decline since September 2015 overnight, as inventories climbed.
Copper for May delivery fell 3.5%, to $2.5330 a pound, on the Comex division of the New York Mercantile Exchange on Wednesday.
--Yifan Xie and David Hodari