Changpeng Wan
The Ongoing Commodities Shakeout
China’s futures markets witnessed breathtaking volatility during the dramatic trading session now dubbed ‘Black Monday’. Throughout night trading on July 28, 2025, prices of several major commodity futures extended staggering losses after already hitting exchange-mandated downside limits during daytime hours. The chaos saw coking coal futures plunge over 11%, glass futures crater by 8%, while soda ash dropped 5% – snapping floor supports that forced automatic trading suspensions earlier. These convulsions reveal deep structural vulnerabilities in commodities markets. This futures market adjustment reflects deteriorating investor sentiment amid macroeconomic uncertainty and shifting supply-demand dynamics.
Key Market Developments
- Black Monday saw six major commodities hit daily down limits simultaneously
- Spot prices cooling as steel and coke markets follow futures downward
- GF Futures Institute identifies Fed policy uncertainty as volatility amplifier
- China International Capital Corporation cautions about ‘involution-style’ supply competition
Anatomy of a Flash Crash
Market-Plunging Commodities
The July 28th collapse hit energy and building materials sectors hardest. Coking coal futures hemorrhaged 11% in overnight trading after hitting downside limits during regular hours. This triggered domino effects across industrial supply chains while glass futures plunged 8% as property sector concerns intensified. Variable trading limits implemented by the Zhengzhou Commodity Exchange aimed to contain panic but couldn’t halt cascading liquidation orders across commodity derivatives.
Four core materials exhibited synchronized distress: industrial silicon crashed through support levels while carbonate lithium futures extended a multi-month downtrend. The ferocious selling pressure reflected traders fleeing crowded positions en masse. Market-maker liquidity evaporated during peak volatility precisely when orderly price discovery mechanisms were needed most.
Spot Market Contagion
The futures market adjustment metastasized into physical trading hubs. Tangshan billet prices slid 30 yuan/metric ton to 3,090 yuan as of July 28 price assessments according to Mysteel data. Nationwide hot-rolled coil averages fell 38 yuan/ton while imported iron ore at Shandong ports retreated 16-20 yuan/ton. Crucially, spot prices remained significantly detached from futures pricing – national rebar averaged 3,421 yuan versus futures settlement prices hovering near 3,200 yuan.
A Shanxi coke producer revealed cooling physical market sentiment: ‘After Friday night’s derivatives crash, spot buyers vanished overnight. Several high-premium coal auctions failed entirely’. Such divergent behavior highlights fundamental mismatches between paper and physical markets that magnify volatility during liquidity events.
Fundamental Market Pressures
Supply-Demand Imbalances
The National Bureau of Statistics confirmed worsening imbalances despite the price declines. Mid-July coal surveys showed average premium-grade coke rocketing 7% to 1,150 yuan/ton. Thermal coal benchmarks reached multi-month highs as provincial governments implemented fuel-hoarding measures ahead of the August demand window. Market analysts at China International Capital Corporation Ltd (中金公司) highlighted chronic oversupply issues plaguing thermal coal markets – prices plunged to five-year lows in H1 despite escalating logistical costs.
‘This irrational pricing stems from reckless volume competition among producers ignoring fundamentals’, remarked a veteran CICC analyst. ‘Until supply chains implement market-disciplined production, these systems will remain vulnerable to flash volatility’. Structural reforms appear vital considering China’s exhausted high-quality coking coal reserves get depleted annually while import substitutes cannot replace domestic grades.
Macroeconomic Amplifiers
Heightened futures volatility coincided with crucial external risk events. Zhang Xiaozhen (张晓珍), head of GF Futures Research Institute, identified Fed policy uncertainty as the underlying trigger: ‘With July’s Federal Open Market Committee approaching, traders broadly revised down rate-cut expectations – strengthening the dollar and crushing commodities’ multi-asset appeal.’ She noted escalating Sino-American trade tensions created parallel capital flight.
This macroeconomic feedback loop amplified existing anxieties regarding China’s property downturn and manufactured goods oversupply. Market participants increasingly view industrial commodities as proxies for Chinese credit expansion – meaning policy signals resonate disproportionately through futures channels.
Pathway to Market Stabilization
Industry Recalibration Efforts
The China Futures Association began reviewing circuit-breaker implementations while exchange officials signaled tightening speculative position regulations. CICC analysts urged systematic ‘de-involution’: rationalizing output volumes among producers while streamlining regional coal transportation. Such reforms could reduce producers’ pathological ‘quantity-for-price’ substitution approach that systematically distorts markets.
Zhang Xiaozhen proposed an integrated monitoring framework: ‘Regulators must synchronize macro-prudential oversight with bottom-up commodity data flows. Granular Caixin PMI trajectories and Baidu Mobility Trend indices offer invaluable inputs where official statistical pipelines lag’. Realigning bureaucratic reporting cadences with market-moving developments remains crucial.
Investor Positioning Strategies
Professional traders recommend three stabilization approaches:
- Spatial diversification: Rotating allocations geographically beyond domestic exchanges into Singapore SGX iron ore contracts or global coal markets
- Volatility harvesting: Employing option strangles to monetize unstable trading ranges
- Factor hedging: Balancing cyclical exposures with precious metals allocations
Structural reforms calling for fewer but higher-volume contracts could compress counterparty risks according to Shanghai University Derivatives Research Center findings. This futures market adjustment necessitates redesigning contracts to withstand liquidity vacuums.
Forward-Market Trajectories
Short-Term Volatility Forecast
The GF Futures outlook remains cautiously bearish absent macroeconomic tailwinds. Their commodities team expects persistent turbulence into Q4: ‘Unless Federal Reserve guidance turns materially dovish alongside US-China tariff compromises, industrial assets face persistent valuation pressure’. Managed money positioning shows small traders fleeing volatile sectors while institutional participation flatlines.
CICC projects asymmetric rebound probabilities: prompt-month coal could surge if August power demand squeezes inventories while steel may continue bleeding. Both firms emphasize operationally hedging essential exposures rather than chasing volatility whipsaws. This measured approach helps investors withstand extended futures market adjustment phases.
Long-Term Structural Shifts
The Black Monday dislocation likely accelerates two irreversible transformations. Automation-focused warehousing re-engineering now mitigates manual errors during chaotic trading while decentralized blockchain settlement pilots gain regulatory backing to enhance transaction finality.
Environmentally, the crisis validated decarbonization investments as stranded fossil assets displayed destabilizing volatility while battery metals showed resilient spot-futures convergence. Market evolution favors commodities aligned with China’s Strategic Emerging Industries framework.
Proactive Investor Preparations
Market participants should prepare for ongoing turbulence through portfolio triage and scenario planning. Evaluate counterparty exposures before volatile re-openings and establish derivative overlays through qualified brokers. Executives must stress-test commodity-linked cash flows against extreme pricing scenarios.
The ongoing futures market adjustment offers valuable lessons about synchronizing spot and derivative markets while encouraging rational commodity investing strategies.
