China’s state-owned miners have agreed to increase thermal coal output in an oblique attempt to mitigate a sharp rise in the coking coal price that is punishing the nation’s steel mills.
The price of the coking coal, also known as metallurgical coal, has doubled in the past six weeks, catching the Chinese industry by surprise and offering a rare spot of cheer to producers in Australia and elsewhere.
The rise prompted a protest from the China Iron and Steel Association, which represents large state-owned steel mills.
In an emergency meeting on Friday, the nation’s largest state-owned coal miners agreed to increase output.
That comes after months of production cuts by beleaguered miners as Beijing attempts to rectify extreme overcapacity in the coal industry and permanently shut debt-ridden mines whose deposits have been tapped out.
“We misjudged — we didn’t think the production limits would be so effective,” said Henry Liu, research director at CEBM in Shanghai.
State planner the National Development and Reform Commission has sent inspection teams to assess how much metallurgical coal stocks steel mills are holding and how much they plan to buy.
Coking coal supply to steel mills traditionally tightens in winter when cold weather slows mine operations in northern China and Mongolia.
Increased output of thermal coal does not necessarily resolve the squeeze in coking coal. But it does help keep a lid on coal prices in China, reducing pressure on thermal power generators and preventing the rally in coal prices from feeding through to the power sector.
Coal and steel prices have been on a roller-coaster ride in China this year after well-placed bets in January that inventories had fallen too low sparked a run-up in Chinese future prices.
The steam went out of that rally in April, when prices overshot. The bump provided an unexpected boost to the steel industry, frustrating government efforts to shut down steel mills and reduce overcapacity.
Steel profits stayed healthy until early August, before being eroded by the rising coking coal price.
While the coal industry used to be a “wild west” of extremely market-sensitive private miners, many have folded up shop in the face of discriminatory investment and loan policies, rising debt and weak prices.
That leaves the more obedient state-owned miners which respond more quickly to government efforts to secure energy supply to steel mills and power plants. “It’s a planned economy again,” Mr Liu said.
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