COMMODITIES-China commodities slide drags metals lower-UPDATE 1

Trade the News

Saturday September 11, 2010 08:52:10 AM GMT

* Fund probe talk sparks 5 pct drop in Shanghai zinc

* China commods fall spills into LME; zinc pares 6.5 pct fall

* No evidence of investigation; rumour was rife (Adds quotes)

By Nick Trevethan

SINGAPORE, Sept 9 (Reuters) - Industrial commodities, metals and rubber in particular, took a beating at the hands of investors spooked by talk of a probe into rubber and zinc trading in the world's top consumer of the commodities. Talk of the probe spread rapidly through China's commodity markets, hitting rubber, zinc and soy and rippling quickly to other commodities in Asia and the rest of the world.

Several analysts said the China Securities Regulatory Commission was investigating a dealer from Zhejiang province who had built a long position of 60,000 rubber contracts, held by 10 brokerages, and had been forced to liquidate it by the regulator, triggering the wider sell-off.

Officials at the CSRC were not immediately available to comment. The Shanghai Futures Exchange declined to comment, referring questions to the Zhejiang branch of the securities regulatory commission, which also declined.

Prices would remain volatile until regulators in China made clear whether anyone was under investigation, said William Adams, head of research at UK-based FastMarkets.com.

"People have noticed how open interest and trade volumes have picked up in certain products in China and we have also heard talk of a crackdown. It's still a matter of sell the rumour, buy the fact. For now we could see more impact on the downside."

For a graphic of Chinese commodity futures prices: http://graphics.thomsonreuters.com/AS/0810/NT_20100909112536.jp g http://graphics.thomsonreuters.com/AS/0810/NT_20100909115049.jpg

Shanghai's most active rubber contract <SNRc4> closed at 25,445 yuan, down 3.8 percent, after having hit a two-year high in early trade.

"A five-minute fall like that is scary. If this had happened when things were busy, we'd have been looking at even lower levels," a commodities trader in Singapore said.

"This is going to scare speculators out of their wits. We heard stops in LME zinc placed at $2,190 were not filled until $2,140 because the fall came so fast and there were so few buyers."

Benchmark third-month Shanghai zinc <SZNc3> briefly touched its 5 percent limit before recovering 505 yuan to stand at 17,550 yuan per tonne by the close. The market opened at 18,155 yuan, up from Wednesday's close of 18,070 yuan.

London Metal Exchange zinc <CMZN3> fell 2.4 percent to $2,165 by 0920 GMT. Prices had earlier dropped to $2,075.25, tumbling 6.5 percent, as panicked investors rushed for the door.

"The thing about zinc is that it has been living a lie. Prices got up to $2,236 -- a four-month high. The issue is that I can see a near-million tonne refined zinc surplus," Nick Mooore, head of research at RBS said.

"Combined LME and Shanghai stock are their highest since 1995 and there is no reason for the market to be as bullish as it was. This is a nice excuse for profit taking."

Chinese regulators have repeatedly tried to crack down on trading practices that could lift prices for the raw materials that feed the country's vast manufacturing economy.

Away from industrial metals, other markets were quieter. Crude oil pared gains to trade around $75 a barrel after rising as much as 60 cents to $75.27, approaching this week's high of $75.39 reached on Wednesday. ICE Brent crude gained 9 cents to $78.26.

Oil's early gains came on the back of an industry report on Wednesday showing U.S. crude stockpiles unexpectedly plunged 7.3 million barrels last week, while easing concerns about the health of European banks reassured investors.

"There are tentative signs of improving demand from what we saw last week," said Stefan Graber, a commodities analyst with Credit Suisse in Singapore. "That could suggest demand conditions are firming indeed."

Spot gold <XAU=> fell 0.07 percent to $1,253.65 an ounce after hitting a low of $1,252.80 an ounce in thin trade. Bullion had risen as high as $1,262.25 on Wednesday, not far from a lifetime high around $1,264 hit in June. (Editing by Clarence Fernandez)

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