The iron and steel market in China is nothing if not dynamic.

A recent TSI monthly review advised on the one hand how crude steel volumes in June hit a record 59.93 million tons, or 2 million tons per day, building on first half 2011 production that at 350 million tons was 9.6 percent up on the same period last year. Iron ore imports however were up only 8 percent and in line with CISA’s goal of increasing dependence on Chinese-owned ore sources — still mostly domestic but increasingly coming from overseas — over those of Australia, Brazil and India.

By 2015 the industry intends to meet half its requirement from Chinese-owned mines. If steel growth were to continue at 9.6 percent per year, that would leave BHP, Rio, Vale and lesser suppliers with similar volumes if a smaller slice of the overall cake. But steel growth at this level is looking far from likely in spite of what China bulls have been saying.

Estimates for the first 20 days of July show steel production dropping to 1.95 million tons per day as output for the second half of the year is expected to drop to an annualized rate of about 700 million tons – if the first half was 350 million tons, by extension that suggests a 10-15 percent drop for the second half. Quoted in a Financial Times article this week, Zhang Changfu, vice chairman of CISA, confirmed the official expectation that “steel production growth will slow down further in the second half of this year.”

Interestingly, the balance of products is shifting as the economy adjusts to credit tightening and falling exports. The manufacturing sector has slowed, as evidenced by the July PMI number from HSBC, which came in below 50 for the first time this year. As a result, flat steel sales (manufacturing is a key consumer of flat rolled products for automotive, shipbuilding and machinery industries) have weakened while long products have remained firm. Structural steel sections, reinforcing bars and pipe are key products for the construction sector still being driven by Beijing’s’ social housing program.

The combination of cooling demand from the manufacturing sector and greater iron ore supply from domestic and overseas Chinese-owned iron ore mines could see a fall in both demand and hence prices for iron ore. Lower input prices would allow Chinese steel mills to reduce finished steel prices, a move that could start as soon as September. With the backdrop of falling PMI figures from all major trading blocks, raised sovereign debt fears, and weakening consumer sentiment in the West, we could see not just Chinese, but global steel prices ease later this year and next.