Sluggish growth in China’s steel industry is one reason for coking, or metallurgical coal sinking below $US120 a tonne in the spot market, according to analysis by the investment bank JP Morgan.

Weather patterns are a secondary factor in the coal-market with Queensland’s traditional summer cyclones refusing to perform on time. That means more coal than in previous years is making its way onto the market, just when it is not wanted.

Oddly, weather is having precisely the opposite effect on the thermal coal market, but more about that and what it is doing to the North American coal sector later.

First, a look at the issue confronting producers of met coal such as BHP Billiton, which is the crisis gripping China’s iron and steel sector. There a potent mix of tougher government environmental regulations and a melt-down in its fringe banking sector has led to near-panic trading.

What has happened to China’s steel mills, and by extension the met coal and iron ore market, is that the Chinese government has ordered the most polluting steel mills to either modernise, or close. This is part of a countrywide environmental clean-up focussing on the killer smog that routinely blankets major cities.

Alongside the clean-up orders, the Chinese economy is itself moving from its hectic, construction focused growth towards a greater concentration on the service sector and household consumption.

As if those issues were not enough to hit demand for met coal and iron ore, there is a credit squeeze in China forcing the unravelling of complex financing arrangements that have turned commodities such as copper, iron ore, and perhaps even coal, into a form of collateral to support bank loans.

This “shadow banking” world that supports commodity-backed lending is unique to China. It has developed because of government regulations governing credit, and the fact all banks are ultimately answerable to the government.

At some point the house of cards built by Chinese speculators in commodities and fringe banking was destined to collapse, just as the lending practices of sub-prime mortgage providers eventually collapsed in the US back in 2008.

History has a funny way of repeating itself, and of crossing international borders.

The event that served as the trigger for the crisis gripping Chinese banks, steel mills, and importers of iron ore and coal was solar-power company Chaori Solar.

Despite being tempted to say something rude about solar power The Hog will resist because it is a topic that has been well-aired, even if the Chaori failure qualifies as a unique event in Chinese history. Chaori was the first company to default on an issue of interest-bearing debt, also known as corporate bonds.

What caused Chaori to collapse will be the subject of multiple investigations that will have no direct bearing on the coal or iron ore industry, except to further muddy already murky waters.

Time is the only solution to what is happening in China. That means time to sort out the complex and interlocking financial structures, time to re-shape the heavily polluting steel industry, and time for stockpiled of surplus commodities used in financing structures to be absorbed.

What it also means is prices for most raw materials caught up in the crisis will suffer from distress selling as speculators and commodity traders are forced to cut their exposure at the best price possible, and that sometimes means any price.

Little wonder met coal is under price pressure.

The same might also be said of the thermal coal market if not for events in North America where frigid weather over the past two months has led to a record consumption of natural gas for home heating.

According to the JP Morgan view of the coal market, the cold weather and heavy drawdown on gas means coal has once again been forced to come to the rescue of US industry and households.

“It’s early to change forecasts for US domestic coal prices but we feel the price risk is to the upside as operators now worry if they will be able to rebuild coal and gas inventories ahead of the peak power demand for summer cooling,” JP Morgan said.

It should also mean, and this is good news for Australian coal producers, that some North American coal will be removed from the export market.