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Mauling in the Chinese steel market throws up gory prophecies

Steel News - Published on Wed, 29 Aug 2012

Endless misery in Chinese steel market has borne catastrophic impact on the global sentiments. Caught in an endless whirlpool repetitive analysis is pedantic though unavoidable.

Errant mills gushing out steel with impunity and impudence scoffing at the tenants of rational marketing only deepens the cesspool. Hard landing in both finished and iron ore prices by 5% and 15% in August alone has gone unnoticed by the mills culminating in inventory levels reaching nearly 16 million ton. Even though major flat and long product mills have reduced the September price by CNY 100 to 200 per tonne it is the small players in the hinterland of dragon land playing havoc. These mills have been unrelenting in production merely conforming to socialistic postulates of employment.

Economy handicapped by tight credit holding tight nos on the fanciful reality market has tottered lower GDP (7.6%) in July. State funded infrastructure and housing projects have been a non-starter.

Unwieldy steel stocks and continued production by mills have back lashed on the iron ore prices which has dropped lowest levels since 2009 March at USD 104 per tonne CNF China . Impact has been so stunning that it has dropped by 11% during last week alone. Stock pile at Chinese port at nearly 100 million tonne nudges mills to blend import with lower grade domestic material consume.

An estimate by ANZ bank predicts that the current inventory to reach optimum level would take at least 6 to 9 months before the market takes a turn. Demand swings notwithstanding such prolonged normalization makes outlook gloomy.

Government might get into overdrive in Q4 to complete yearly targets before the change of guard at the helm. However it calls relaxation of lending rate even at the risk of partial hike in inflation. Stepped up spending on state aided housing, infrastructure projects and railways will make a difference. Ease of credit will have positive impact on consumerism giving crutches to declining PMI (48) remaining below 50 for the 5th straight month.

Ironically indirect infusion of CNY 278 billion during last 10 days through open market operations by PBOC and slight improvement in reality prices has not translated into hike in steel prices. About a month to go for Chinese national holidays (1-7th October) odds are pinned on post holiday period for pre-winter buying.

Source - Strategic Research Institute

Posted By : admin on Wed, 29 Aug 2012
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