An unexpected surge in coal prices has led to Chinese steel mills being forced to reduce output. Chinese steel companies have this year been under constant pressure to reduce their steel production but little was done and earlier in the year, a number of mills were operating at near full capacity, however, in recent weeks a number of the furnaces have been operating at an unusually low 86%.
Beijing are largely responsible for the reduction in steel production (no doubt to the delight of the rest of the world), this year the state has been cracking down on the level of coal production amid the global fight against pollution. Therefore, the reduction of coal capacity has forced businesses to hike their prices, and when you consider coal is an ingredient that constitutes about 20% of steelmaking production costs, you can see why it’s had such a significant impact.
Traditionally, December is a month that Chinese mills will slowdown production to match limited demand, a month they also tend to complete the seasonal maintenance of their mills, however, due to the unusually high prices both of these activities have been brought forward. As stated, this time of the year is naturally one of the quietest for Chinese steelmakers, so if it was ever going to happen then now is arguably the best time, however, the biggest concern will be whether the hiked coal prices will be reverted come spring when demand tends to increase.