Chinese steel mills appear to be cutting production, after a sharp increase since December, reflecting fresh concerns about domestic demand and doubts about whether the Chinese economy has bottomed out.

Since the onset of the financial crisis, Chinese steelmakers have swung between two poles of over-reaction. First they slashed output in October and November. Then, after the government announced a Rmb4,000bn ($585bn) stimulus package in November, many resumed near full production even though the stimulus package is unlikely to impact demand until the middle of this year.

Now mills appear to be swinging back toward pessimism. Chinese steel prices, which climbed in December and January, have started to slide since the end of the Chinese New Year holiday this month.

“Everybody got excited, they all wanted a piece of the infrastructure projects,” says Paul Bartholomew of Steel Business Briefing in Shanghai. “But since then, it’s fallen off a cliff, there is no demand.”

The swing will have an impact in the iron ore market, which is immersed in the critical annual price negotiations. Spot iron ore prices, currently $85 a tonne, have recovered 33 per cent from October, but market watchers see prices falling.

JPMorgan said demand needed to pick up to justify the increase in steel production and iron ore purchases. “There does appear to be a clear increase in concern among steel mills and steel traders that they might have got a little too ahead of the economy, a little too soon.”

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