China can be termed as wonderland of steel industry. The happenings in this wonderland has mesmerized the steel industry for quite some time however the 2011 seems to be an earmark year wherein contradictions of multi dimensional nature has kept the pot boiler steaming. The plethora of paradoxes on the supply and demand side has kept the operators awestruck as each hypothesis is demolished with the passage of events and the period.

Whilst the year started on an auspicious note with an impressive rally in steel prices by 5% within 6 weeks. The impetus frittered after the spring festival typically a period of bolstered demand as the spring season sets in with heightened construction and economic activity. The reasons imputed where a relentless campaign by the government to reign inflation by hiking the lending. The Chinese economy beset with shortages and runaway escalation in reality prices could ill afford any laxity on this front with fear of social unrest looming large.

The market definitely had its share of undulations with prices showing some glimmer of hope around mid-March which continued up to mid-April primarily propped by high input cost iron ore and coke but to some extent propelled by residual demand during the summer.

Noticeably the market inherently never lacked in momentum and potential to generate demand in an economy which flourishes GDP target of almost 9% in 2011. But the demand floundered at every hike of interest rate puncturing the built up. Typically it became cat and mouse game between the hike in interest rate and the propensity to buy. However nearly 13 times hike in interest rate over a year had the better off the market. Buying and prices groveled despite having the making of definite revival as buying became expensive. The canvass of steel industry in China is puckered with deflections at every hike interest rate.

Ironically the steel production eclipsed new levels with each passing months evidentially confirming confidence in the market. When the market was groping for that straw of debacle an extraneous factor of power rationing in June was expected to give the desired facelift. However it has been noticed that the last 10 days of June was marked by record breaking 2 million tonne per day production. Corollary it can be inferred that the stock levels with most of the mills have been at controllable levels despite a runaway production and below par demand.

At the same time it has been noticed that the price levels have vibrated within a narrow band of CNY 500 per tonne for rebar all through the Q2 indicative of an inherent strength.

The contradictions have tainted the iron ore prices as well which has off late been showing strength USD 180 per tonne CNF to USD 182 per tonne CNF an improvement by USD 2 per tonne in July despite a burgeoning stock of nearly 93 million tonne at the ports.
Q3 seems positive with the futures market showing formation. Moreover with the much touted 10 million budget housing and other infrastructural expensed yet unaccomplished in the 12 Five Year Plan as year draws to close the urgency is expected to spruce the market levels. At the same time state still weary of runaway inflation which has never been brought down to the target levels of 4.5% with current figures of 5.5% has yet again up the ante with 25 basis points hike last Wednesday ie 6th July).

Whosoever wins this tug of war certain fundamentals are clearly visible to an expert eye.
1. Demand has all through been in Chinese economy as the mills have prudently attempted production flurry MoM
2. H2 is likely to be a turnaround as the yearly targets needs to be accomplished
3. Input cost will continue to reign at high levels with some corrections as the global demand would increase with rejuvenated production in other quarters as well.

Although presently the steel market is quiet it might be termed as lull before the revival if not the storm. Meanwhile with subdued domestic levels export levels keep diminishing to live up to the competition.

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