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Doubts cast over whether China can cut back huge coal and steel sectors as prices of commodities rebound

China’s efforts to reduce overcapacity in the coal and steel sectors have recorded a slow start, casting doubts on whether the government can honour its pledge to trim down the two huge industries as the prices of the two commodities also start to rise.

President Xi Jinping has made reducing overcapacity a cornerstone of his economic reform policy since late last year, but China’s progress in curbing excessive production at coal and steel plants has fallen behind schedule.

China’s over production and export of steel has become a source of friction with the United States and European Union, with allegations that it is dumping cheap, subsidised steel on overseas markets, harming local manufacturers.

Record Chinese output risks raising steel tensions with US, EU

US President Barack Obama met with Premier Li Keqiang on Monday at the United Nations General Assembly in New York and urged China to continue addressing industrial overcapacity, according to a White House statement.

Beijing has set a target of cutting excess capacity in steel by 45 million tonnes and by 250 million tonnes in coal by the end of November.

By the end of July, however, only 47 per cent of the capacity reduction target in the steel industry and 38 per cent in coal were achieved, according to the latest available data from the National Development and Reform Commission, the country’s economic planning agency.

Steel production output actually increased by 2.2 per cent in the first eight months of the year compared with the same period in 2015.

The price of the most traded form of steel on the Shanghai Futures Exchange is still a quarter higher than a year earlier, offering steel plants sufficient room to make money. Profits at private steel mills in Hebei province, an important steel production base in China, nearly tripled in the first half of this year, the state-run news agency Xinhua reported earlier this week.

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Coal output in the first eight months of the year fell 10 per cent set against the same period in 2015.

It has created a sharp increase in coal prices across the country. The benchmark coal price at Qinhuangdao, the nation’s major coal port, is a third higher than the beginning of this year.

China’s economic planning agency gathered the country’s major coal producers in Beijing earlier this month telling them to boost output.

Economists and analysts said it would be an uphill battle for Beijing to keep the lid on output, even though some obsolete plants were expected to close down.

“Output can still rise, even though production capacity is falling,” said Claire Huang, a Hong Kong-based China economist at Societe Generale.

Huang said many idle facilities could be put to use if the market became favourable for producers, which in turn would boost exports.

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China is also consolidating large state-owned plants to create even bigger and more formidable players. The government has approved the merger of Baosteel and the loss-making group Wuhan Iron and Steel to form a behemoth with annual production capacity over 60 million tonnes, the business news outlet Caixin reported.

If confirmed, the new state champion would become the world’s second biggest steel producer only after ArcelorMittal, with capacity larger than that of Germany and Britain combined.