We were fairly bullish on steel stocks in general, and ArcelorMittal (NYSE:MT) in particular not so long ago, but something has changed. In fact, it isn't rocket science. As we argued in the previous article, the world steel market is mostly beholden to China.

That's where most of the demand comes from, but also the most supply (China produces roughly half of the world's steel). What's most significant is the imbalance between the two, as China still suffers from a huge overcapacity in the steel sector.

The situation in China is fairly volatile. At times, the government (or local authorities) push on the stimulus accelerator, especially in infrastructure and construction, and the Chinese steel surplus diminishes, prices zoom up, and world steel stocks rally.

It's also not hard to guess what happens next. When the stimulus abates, as the Chinese periodically worry about the amount of leverage they have in the economy, then the whole process cranks into reverse.

Apparently we're in such a period, as you can see from the graph. These cycles tend to be reinforced by inventory build-up and drawdowns. Huge inventories get built up in expectation of rising demand, but this can be overdone which requires a period of inventory drawdowns which tends to collapse prices (from Business Insider):

China's statistics bureau said that crude steel output grew by 1.8% to 72 million tonnes in March, more than a million tonnes more than the previous record high of 70.653 million tonnes set one year earlier. The record-breaking monthly output followed news that Chinese iron ore imports rose to 95.56 million tonnes in March, the second largest monthly total on record. Over the year, that left imports at 1.054 billion tonnes, the largest 12-month total on record. It was also 8.9% higher than the total imported in the 12 months to March 2016. The voracious appetite for iron ore has contributed to Chinese port inventories ballooning to 131.35 million tonnes, according to data provided by Shanghai Steelhome, just shy of the all-time record peak of 132.45 million tonnes seen in late March.

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