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The unintended consequences of China's coal cuts: pain for steel mills
September 23, 2016 / 11:06 AM / a year ago

The unintended consequences of China's coal cuts: pain for steel mills

BEIJING (Reuters) - The unintended consequences of China’s efforts to shrink its coal industry emerged this week as Beijing called another last-minute industry meeting after government-enforced mine closures choked off coking coal supplies to troubled steel mills.

A worker speaks as he loads coal on a truck at a depot near a coal mine from the state-owned Longmay Group on the outskirts of Jixi, in Heilongjiang province, China, October 24, 2015. REUTERS/Jason Lee/File Photo

Shortages and soaring prices were top of the agenda at a hastily-called gathering on Friday, the second in as many weeks that the government state planner has scheduled with executives from the nation’s major coal producing regions.

In the end, the state planner, the National Development and Reform Commission (NDRC), rejected pleas by the steel industry for mines to ramp up output of coking coal, a key steelmaking raw material, two sources familiar with the outcome said following the meeting.

But, it did give a green light for 74 major miners to increase thermal coal output, partially reversing capacity cuts that have sent prices soaring and depleted domestic stockpiles this year.

It was not clear why the government agreed to help replenish supplies for the utilities and not the steel mills.

Even so, traders in Asia viewed the meeting as a sign of panic as Beijing tries to shift the world’s largest energy market towards cleaner, renewable fuel sources, while ensuring utilities and steel mills have enough raw material.

How the authorities deal with this headache could be seen as a blueprint for its massive steel and aluminum industries where closures of old, outdated plants have also boosted metal prices.

The mine closure issue has roiled coking coal contract talks, with little sign that a recent price rally is running out of steam.

Traders said negotiations for fourth-quarter contracts for seaborne coking coal are at stalemate as steel mills balk at producer offers that are more than double third quarter prices.

While producers want $200 per tonne FOB, mills are resisting even $150 to 160 per tonne FOB, a difficult jump from the third-quarter price of $92.50 per tonne FOB, a trader said.

China’s biggest supplier Shanxi Coking Coal Group Co Ltd [SHANXA.UL] has already raised its price three times since last month, said Zhang Min, a coal analyst with Sublime China Information Group.

Coking coal prices from the major producing Shanxi region have more than doubled to 900 yuan ($135) this year, according to Zhang.

“There are plenty of uncertainties in how the government administrative measures will work, whether the meetings will generate real output growth,” said a Beijing-based coal trader with Mercuria.

“Before the market sees any substantial output increase before the winter, prices will continue heading north.”

Additional reporting by Gavin Maguire in SINGAPORE; Writing by Josephine Mason; Editing by Christian Schmollinger

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