Winter is the smoggiest season in China. The next few months will give commodity investors a chance to reassess whether the government is serious about curbing polluting industries. This year, coal-burning manufacturers and electrical utilities will be drafted in to help. This will hurt seaborne coal importers such as mining companies BHP Billiton or Anglo American.
Domestic benchmark coal prices are a fifth above the range targeted by the National Development and Reform Commission. Prices doubled last November, when the government told miners to shut down for a quarter of the year. Similarly, production cuts in steel mills were strictly enforced — which boosted steel prices and margins for steelmakers. Aluminium followed suit.
Given the impending capacity cuts at manufacturing plants, demand for electricity could be 4.5 per cent lower than the average during the four months from November to March, according to analysts at Liberum. China burns about 300m tons of coal in a winter heating season. The plants will require less of the black stuff to produce the diminished output.