China could be causing turbulence and uncertainty in the global iron ore market amidst the annual contract talks. The iron ore spot prices have fallen to the level of about $40-45 per tonne from India for standard grade fines. Such prices will add pricing power to the steel mills. The Chinese mills are getting the best of the iron ore prices and ocean freight today.

Steel prices have continued to fall worldwide accompanied by the same trends in major raw materials such as scrap, coke and iron ore. This can happen only when there is excess capacity in the industry or massive stock.

Whatever information is globally available, inventories of steel with the producers, service centres or at the users’ end have fallen in the last couple of months. Even production is down sharply and one should have expected the price to recover with the cut in production. However, the negative sentiments continue and the global steel market continues to drift downward.

One knows that there is massive excess capacity and the industry is taking time to adjust to lower levels of production. But, that also cannot be sustained without really resorting to cost reduction and job cuts. There has been a strong resistance to job cuts. It is possible and in many ways correct that the industry is looking to job cuts driven by undue panic. But, the reality today is such that global steel production will be required to be cut much more than what has been already so far.

In India, steel output has reportedly been shown to have fallen in February. The flow of numbers on Indian steel industry’s performance does not matter much today. We do not really care if the steel production or consumption reported has gone up or down and if so by how much.

We know the same have fallen sharply although not as much elsewhere in the world, barring China.

China seems to be on the revival path. Steel production has shot up year-or-year in February by over 4%. This is incredible. One finds it difficult to understand how the industry has performed better amidst such a slowdown in the end using sectors.

Or, is it that they have miscalculated the likely impact of the stimulus package in the country and got excessively over-optimistic on the future.

China’s stimulus measures have raised confidence in the economy. The Chinese common man and the entrepreneur are driven by sentiments more than others and not by the fear of consequences of a faulty decision. The steel makers are seeing steel demand rise. But, the reality is that the overall impact of the new steel demand emanating from the government’s boost up measures will be largely neutralised by the loss in exports of steel-bearing products. Exports of steel have fallen sharply and an industry association believes that it will fall 80% in 2009. Although the same agency expects the steel consumption to be at 460 million tonne (perhaps in terms of finished steel), these are rather wild optimism. China’s own steel consumption will drop in absolute terms and with reduced exports will be forced to cut domestic production. Therefore, if steel output in the country is growing today, the same will fall very soon.

China is planning to build a huge steel inventory, but, one does not know how. But, let me assume that it is done by a government agency to protect the steel makers from the current downturn.

But, the question is how long will they hold that? The built up inventories will be the first ones to reach the market as and when the market revives, leaving the steel makers stranded.

?The author is a strategy consultant and the views expressed are personal