In the last week of October, the China Iron and Steel Association said all Chinese steel producers were unprofitable for the month because of plummeting steel prices.

Given the obvious link between coking coal and steel, Dow Jones Newswires reported that UBS expects reductions in coking coal output to follow.

“While the coal producers have not made any announcements regarding volume pushback, the steel production cuts would suggest that we should expect to see this soon,” the broker said.

However, Bloomberg has reported that the Chinese government’s recently announced stimulus package – which will be used by the end of 2010 – has Daiwa Securities Group expecting new growth in steel demand.

“Steel demand will be the first to benefit,'' Daiwa Securities Group analyst Helen Lau said of the package, which aims to ramp-up housing, roads, railways and airports investment.

“We will see consumption accelerating from the second to third quarter after steelmakers deplete stockpiles.”

Lau is reportedly forecasting China's steel production to rise 5% next year under the new government investment package.

In the meantime, Rio Tinto yesterday announced a 10% cut to its Pilbara iron ore production because of declining steel demand.