In Depth: Policy Bets Send Chinese Commodities on a Rollercoaster Ride

A speculative frenzy has recently overtaken China’s commodity futures markets, resulting in extreme volatility in key industrial materials such as lithium and polysilicon. Prices for these commodities have soared and then collapsed within days, dramatically impacting investors—some have seen fortunes made and lost overnight. For example, on August 18, one lithium carbonate short seller was wiped out, losing 16 million yuan ($2.2 million), while another trader temporarily turned 22 million yuan into 280 million yuan, only to lose most of the gains in just four days. This turbulence reflects a broader wave of speculative trading that began in July, driven by traders interpreting new government campaigns against "involution" (destructive competition) as signals to take bullish positions on industrial commodities, regardless of weak fundamental demand or high inventories. The market has thus become a battleground between policy-driven speculators and fundamentally-oriented industrial players, creating chaos for both investors and regulators. Many in the industry now argue that fundamentals have become irrelevant, with excess liquidity driving price movements instead [para. 1][para. 2][para. 3][para. 4][para. 5][para. 6].

Since July, contracts for polysilicon, lithium, and coking coal surged up to 60%, reaching daily limit moves repeatedly—coking coal hit limit-up in eight of ten sessions. Lithium carbonate futures, for instance, saw open interest swell to over 900,000 lots, far exceeding the available warehouse receipts of 23,600, demonstrating that speculative positions vastly outweigh real demand. The frenzy was triggered by a slew of policy announcements: government meetings on solar regulation, anti-competition law revisions, mine shutdowns, and coal sector inspections all suggested to traders that Beijing might soon enforce industry consolidation and supply cuts. Sectors with the worst overcapacity—polysilicon, coking coal, and lithium—have led the rallies, even though fundamental demand remains weak. Some analysts draw comparisons to 2015-2018 supply-side reforms, which successfully propped up prices, but others caution that today’s environment, with property-sector weakness and a mainly market-based anti-involution push, is quite different [para. 7][para. 8][para. 9][para. 10][para. 11][para. 12][para. 13][para. 14][para. 15].

The speculation has driven the market into “contango”—futures prices running ahead of spot prices—due to expectation rather than real demand. Hot money from hedge funds, retail investors, and algorithmic (quant) traders has played a major role. Open interest in lithium carbonate futures has jumped by 51% since July, totalling more than China’s 2024 output and 75% of expected global production. Quantitative funds, often trading on online rumors and headlines, are now distorting pricing away from fundamentals. Meanwhile, industrial participants have used the high prices to hedge and sell future output, citing that the underlying demand remains tepid. Regulators have intervened by raising margins, imposing position limits, and increasing fees, but these measures have sparked sharp reversals rather than halting the speculative tide [para. 16][para. 17][para. 18][para. 19][para. 20][para. 21][para. 22][para. 23][para. 24].

Policy uncertainty persists. Efforts to consolidate the polysilicon industry have stalled over asset valuations, as speculative price surges have given struggling firms financial breathing room, making them reluctant to sell. In coking coal and lithium, regulatory actions such as inspections and mine shutdowns have fueled expectations of supply shortages, though actual impacts remain opaque. For instance, a critical CATL-owned mine shutdown in Yichun cut half of local lithium output, stoking fears of shortages through October [para. 25][para. 26][para. 27][para. 28][para. 29][para. 30][para. 31][para. 32][para. 33].

Despite soaring futures and spot prices—polysilicon futures are up 50%, spot up 38%—actual transactions are rare due to prohibitively high prices, and some capacity has paradoxically increased amid consolidation talk. For coking coal, an influx of cheap imports from Mongolia and flagging steel demand may soon pressure prices. Lithium may see its deficit ease by November as supply disruptions resolve. The overall supply-demand imbalance remains, with inventory simply circulating among speculative hands, underscoring that China’s commodity boom is fueled by expectations, not economic fundamentals [para. 34][para. 35][para. 36][para. 37][para. 38][para. 39][para. 40][para. 41][para. 42][para. 43][para. 44][para. 45][para. 46][para. 47][para. 48].