Two mill sources said the rebound in domestic steel prices since mid-August was driven primarily by higher coking coal and coke prices amid tight supply rather than any

meaningful recovery in steel consumption.

Elevated steel inventories and uncertain demand prospects continue to pose downside risks to the market, they said. While rising coking coal and coke costs have provided support for steel prices, if seasonal demand recovery turns out to be weaker than- normal, the steel market could still come under pressure in September, they added.

“If demand remains weak in September and steel mills continue to struggle with profitability, mills may be forced to implement larger output cuts,” the first mill source said.

However, the same source noted that more aggressive steel production reductions would likely weigh on iron ore and coking coal prices, offsetting part of the support such cuts could provide to steel prices.

Although one mill source and two traders said steel output had declined further in late August and added that seasonal demand improvement in September should prevent steel prices from falling in that month.

The performance of September demand will be critical in determining whether China’s steel industry can return to profitability or whether broader production cuts become necessary to rebalance the market, they added.