Temperament in the Chinese steel market remains fickle with mood swinging from faint optimism to despondency with slightest deflection in fringe factors.

After a fortnight of breather when finished prices drifted from bottoming out to slight improvement, iron ore levels over reacted on trader speculation and mills interest in replenishing stocks after nearly 3 months gap.

Some disturbing reports about a squeeze in Chinese money markets over the past two weeks has sharply tightened monetary conditions, adding to the pressure on the People's Bank of China to take steps to ease policy. However the government remaining committed to tolerating short term pain to achieve its policy objectives - containing financial risks and secure sustainable growth in the long term as yet seems reluctant to loosen credit policy.

An imminent liquidity squeeze may prompt steel mills to rush to sell their inventory of steel products, resulting in lower prices that will hurt their profitability or widen their losses. Spot iron ore prices are also likely to retreat this week with mainland mills holding off on restocking amid concerns over a cash squeeze in the world's top market.

It could cut appetite for iron ore, stalling a rally that lifted benchmark prices to near one-month highs last week.

Impact of the fear is evident with finished market already showing cracks but iron ore levels have as yet resisted correction. However the offer and bids have declined by USD 2 per tonne.