After incessant shedding witnessed over the last two quarters in domestic levels in China market has been hoping for resurgence in Q3 & Q4. 12% drop in steel prices in the first 7 months was not surprising since the market dovetailed the misery in EU and USA the two major trading partners. Even though the monotony was broken at times on speculative flare but the price trends defied all traditions of seasonality.

Government obsessed with reining inflation never stopped breathing down the neck of reality sector which has been the propellant of market demand but has acquired the devilish hue of inflation and speculative demand. Opting for caution over exuberance lest the Chinese economy goes the European way pumped on non-existent demand has been prudent. On the flip side Chinese flagship GDP gradually sank to 8.1% in July from the quintessential rate touching double digit all through the post recessionary. Unable to sustain the onslaught of global economic debacle compounded by tightened credit was too much for the juggernaut.

A belated slackening of CRR by the People’s Bank of China (PBOC) in 3 tranches fizzled out being too little too late. Meanwhile the impudence of Chinese mills was personified in ever increasing steel production in blind quest of retaining the market share. The devastation wrecked by splurge in production against all tenants of rationale led to nearly 9% growth in inventory levels during the last 8 months. A close look at the price movements reveals that the decline has been skewed particularity in July losing 8%. One can take cover under slow construction activity in monsoon but that doesn’t wash off the sins of rollicking production.

Off late some sobriety is seen in the market as downfall in steel prices having reduced. Market has quieted over the past one week expectedly having bottomed out.

Clamor for stimulus is becoming shriller as the only un-trodden course when the GDP estimates are sinking to sub 8% levels. Domestic finished inventory touching nearly 16 million tonne has played havoc with the export levels falling by nearly USD 70 per tonne within a week. Monsoon over and the government sponsored construction projects slated to take off in housing, railroad and infrastructure experts opine that turnaround is on cards.

Some half-hearted voices in government hinting at reduction in lending rate and other growth kindling stimulus has raised hopes. However an affirmative signal of demand generation are lacking with global cues swinging in oblivion. Most of the mills have tightened their belts with daily crude steel production declining by 4% in July over June but the monthly production of 61 million tonnes in July is unnerving. In a realistic move most of the steel majors have reduced steel prices in September by CNY 100-200 per tonne.

In the twilight of 2012 flickers of demand and price improvement is possible but won’t be sustainable unless it is supported by improvement global sentiments. Europe and Middle East slated to re-open after Ramadan and summer recess improved buying in these regions is expected since the inventory levels are low. Moreover MENA nations, Egypt, Libya etc are due for re-construction after the political upheaval and devastation.

End August early September has some surprise in store if the government opts for credit easing and bullishness on state projects to accomplish FY12 targets. If the odds are unfavorable this might be last chance missed by the state and market at redemption from an economic morass.