Coal consumption at independent power plants and steel output at China’s largest mills fell sharply in the second half of August, suggesting weakness in the industrial sector.

Ahead of the publication of National Bureau of Statistics (NBS) data for the first two months of the year on March 13, third-party data for the period monitored by China Confidential points to strong industrial activity, suggesting that official industrial production data in January and February may surprise to the upside. Falling home sales and weaker credit growth, however, highlight the fact that any recovery is likely to be short-lived.

Our survey of power plants, steel mills and pollution treatment companies shows that Beijing’s smog-busting agenda is for real.

Analysts have been debating the reasons behind the sharp slowdown in power consumption in March

There has been a flurry of announced expansions to China’s power grid network this month. This is positive news for the copper industry but could be less good for China’s coal miners, as an expanded grid network has the potential to depress coal prices in the long term.

Political support appears to be growing for the full liberalisation of coal prices, especially as they remain depressed, enabling the government to liberalise coal prices in the near-term while gradually moving towards electricity price reform in the future.

With a flurry of statistics to be announced on October 18 – the day that this report is published – our data is pointing to (CC Oct 4, Macro View) some degree of stablisation in economic activity in September. However, the data, and other evidence, still falls short of signalling a clear rebound in GDP growth following what we expect will be a further slowdown to around 7.4% YoY or 7.5% YoY GDP growth in Q3, down from 7.6% YoY in Q2 and 8.1% YoY in Q1. 

National output of crude steel in August, published today by the National Bureau of Statistics (NBS), slid to 58.7m tonnes, down 5% from July. This confirms our expectations (CC Sept 6 Capital Intensive China) that production cuts have been deeper than estimated by the China Iron and Steel Association (CISA), which put the fall in output at 3% MoM in August. We think September may be another weak month for steel output in spite of signs of rising construction because the steel inventory overhang remains huge.