China sparked a strong rally in coal prices during 2016, when it limited its domestic coal miners to producing on just 276 days of the year, and the reports sparked speculation that the curtailments could continue to support prices for steel-making ingredients like iron ore and coal.

Futures for steel, iron ore and coal surged on Tuesday evening and Wednesday, and the bullish sentiment duly flowed through to Australian equities.

Shares in the big iron ore miners BHP, Rio and Fortescue rose by more than 2 per cent, 3 per cent and 4 per cent respectively.

Nickel and base metal miners like Western Areas and Independence Group, who are widely tipped to enjoy favourable pricing in 2017, also rose by more than 7 per cent and 3 per cent respectively.

Even pure-play coal stocks rose, despite the fact spot prices for coking coal were lower on Wednesday morning and are rapidly descending from their recent highs.

Whitehaven Coal shares closed 2.8 per cent higher on Wednesday.

UBS commodities analyst Lachlan Shaw said the notion that China might curtail more of its excess steel-making capacity had led investors to think that steelmakers would be more profitable, and therefore more able to pay higher prices for the sort of bulk commodities that Australia produces.

"If the market thinks that more capacity closures will lift utilisation, drive higher steel pricing and steel mill margins, then the mills would have more capacity to pay more for iron ore and I think that is why you saw the iron ore futures rise yesterday," he said.


"This is about the Chinese government wanting to reduce the massive excess capacity that exists in these sectors today."

Mr Shaw said curtailments to steel capacity should not be confused with reductions to steel production, and he estimated that about 90 per cent of steelmaking capacity cuts in 2016 were made to mills that were not actively producing steel.

Having sparked a rally in coal prices with their production cuts in 2016, China started relaxing the limits between September 2016 and Christmas, allowing more supply to hit the market and drag coal prices lower.

Premium coking coal prices have duly fallen from $US308.80 per tonne on November 30 to $US188.40 on Wednesday morning, and thermal coal prices have also fallen from $US112 per tonne to $US83 per tonne since November.

But Mr Shaw said the decision to relax the production limits was partly inspired by a desire to ensure China had sufficient thermal coal supplies to last the northern winter, and he said investors should expect some sort of production limit to return as the northern spring arrives in China in coming months.

"My expectation is if thermal coal inventories continue to restock then the Chinese government will return to that 276-day rule, or some sort of rule that is tighter than what they have now," he said.

"The government is trying to achieve a sustainably higher coal price than was the case previously to help make the coal industry more viable."

Shaw and Partners analyst Peter O'Connor said investors should take profits on coal stocks while they still can.

"The bulks have run their course, as gold sector did around mid-year. The next group of stocks to run will be the base metals and diversified names," he said in a note.