Chinese steel and coal output fell in July, as bad weather affected operations and the government’s efforts to rein in overcapacity intensified.

Both industries are in the crosshairs of Beijing’s campaign to control supply and halt ruinous competition, which has taken on much greater urgency as deflationary pressures mount in the economy.

Steel production dropped 4% year-on-year to less than 80 million tons, its lowest this year and a third monthly decline in a row. The fall was less steep than in May and June, however, as reduced supply helped lift margins. Still, output over the first seven months has fallen 3.1% from last year to its weakest level since 2020.

Coal output fell 3.8% to just over 380 million tons, marking its first year-on-year decline in over a year, although production for the first seven months was still at record levels.

While industrial demand for commodities is in a seasonal lull, the weather was also a factor in lowering production, as scorching temperatures and heavy rains forced mines, factories and building sites to curtail activity up and down the country. The coal hubs of northern China, in particular, were heavily affected by downpours that closed pits and disrupted transport.

The coal industry is also contending with government inspections targeting mines that produce above permitted levels. Meanwhile, pollution curbs to ensure blue skies for next month’s military parade in Beijing are likely to keep the pressure on steel output, a large proportion of which is clustered around the capital.

Thermal coal producers are shielded from swingeing cuts to production due to the country’s reliance on the fuel for power generation, which has spiked over the summer as temperatures have soared. But the steel industry — and the miners that deliver coking coal for its blast furnaces — have much less protection.

Property Collapse

The collapse in China’s property market has stripped back a key pillar of demand. Bloomberg Intelligence estimates that excess steel capacity last year was 142 million tons, almost four times the level in 2020. A boom in exports has taken up some of the slack, but rising protectionism around the world is likely to cap sales.

Among other building materials, both cement and glass production continued to fall sharply. Aluminum output stayed elevated as profits at smelters rose due to the drop in alumina costs.

For fossil fuels, refining restarts after maintenance and improved margins saw crude oil processing rise 8.9% year-on-year. Oil and gas output continued to rise in line with the government’s energy security goals.