(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, Sept 14 China's steel and
coal sectors provide contrasting stories so far this year, with
one failing miserably to curb output and the other cutting so
successfully it's led to the unintended consequence of higher
prices and imports.
China's steel sector, which accounts for about half of
global production, continued its recent strength in August, with
output rising for a sixth month to 68.57 million tonnes, the
National Bureau of Statistics said on Tuesday.
This brought the year-to-date total to 536.3 million tonnes,
a mere 0.1 percent lower than for the first eight months of
2015, and putting the country on track to produce more than 800
million tonnes of steel for a third year running.
The resilience of steel output also makes a mockery of
official attempts to reduce capacity in the massively
oversupplied sector, and questions whether Beijing has the
political muscle and determination to actually restructure the
In contrast, China's coal output dropped 11 percent in
August to 278 million tonnes, with production in the first eight
months slumping 10.2 percent to 2.17 billion tonnes, according
to official data.
China has met about 60 percent of its target for 2016 of
cutting 150 million tonnes of coal capacity, according to state
media, as measures to restrict the number of days mines can
operate take effect.
There is little doubt that China's coal sector has met the
challenge of removing excess capacity, and the steel sector
This begs the question as to what is different between the
two, as they should both be subject to meeting the requirements
laid down by the authorities in Beijing.
The main difference appears to be the dynamics of price and
Coal prices started the year at multi-year lows, with the
Chinese thermal coal benchmark SH-QHA-TRMCOAL at 370 yuan
($55.39) a tonne.
It has subsequently rallied almost 540 percent to 515 yuan a
tonne on Tuesday, reflecting the tightening domestic market.
But it's worth noting that most of the gains have come in
the past two months, meaning that for the first half of the
year, China's domestic coal miners were still labouring under
low prices and many were unprofitable.
The production cutbacks also stoked demand for imported
coal, with inbound shipments up 12.4 percent to 155.74 million
tonnes in the first eight months of the year compared to the
same period in 2015.
This additional Chinese demand has also fuelled seaborne
coal prices, with the Australian thermal benchmark Newcastle
weekly index surging 39.5 percent so far this year
to $70.61 a tonne for the week ended Sept. 9.
STEEL GAINS CAME EARLIER
Unlike coal, steel's gains were made in the first quarter,
with benchmark Shanghai rebar jumping 58 percent from
the end of last year to its peak so far in 2016 of 2,670 yuan a
tonne on April 21.
Since then steel prices have trended lower, with the
contract ending at 2,260 yuan a tonne on Tuesday. However, this
is still 33.8 percent above what it was at the end of 2015.
The rising steel price led Chinese mills to ramp up output,
especially from March onwards, culminating in record daily
production in June.
As can be seen from August's robust output, mills have yet
to dial back production even as prices start to moderate, and
the likely reason is that they are still profitable.
Steel mills are making profits of about 300 yuan to 400 yuan
a tonne at current prices, the highest since November 2014,
according to Li Wenjing, an analyst at Industrial Futures in
The improved profitability for steelmakers illustrates just
how challenging it is for the authorities to cut capacity if
money is being made.
China aims to eliminate 100-150 million tonnes of capacity
in coming years, with 45 million tonnes planned for this year.
Even if its does cut this amount, it would still leave about
200 million tonnes of excess capacity in the system, assuming
mills operated at 100 percent.
If mills operated at a more realistic 80-85 percent of
capacity, then China's planned cuts would tighten the steel
market, assuming domestic demand and exports remain around
The market expectation is that Beijing will cajole capacity
cuts in the steel sector over the remainder of 2016, but as
events so far this year show, this is far from a given.
If steel prices remain at levels consistent with solid
profits, it's likely that the mills will resist attempts to curb
their output, and history suggests they are quite good at this.
If prices do retreat further, then it will be easier to cut
steel capacity, but any sustained success is likely to make it
harder to cut more capacity, and may in fact encourage mills to
ramp up utilisation rates and output.
So far this year, the Chinese authorities have accomplished
what they wanted in coal, but at the cost of higher prices, and
failed in steel, because of higher prices.
This shows that interference in markets seldom comes without
side effects, and it will be interesting to see if Beijing
allows higher coal output to soften prices and continues to
tolerate strong steel production in coming months.
(Editing by Joseph Radford)