Chinese steelmakers brace for tariffs on US coking coal
The prospect of an additional 25pc import tariff being imposed on US coal as a result of worsening trade tensions between Washington and Beijing has led Chinese steelmakers to start reassessing plans to increase purchases of US coking coal.
The reversal comes less than two weeks after China’s main economic planning agency the NDRC started considering easing restrictions on US coal imports to China, including eliminating the existing 3pc import tax. US coking coal producers revived exports to China in 2017, shipping 2.8mn t, after the trade had been dormant for years, according to Chinese customs data.
China said late last week it would retaliate after the US announced plans to impose a 25pc tariff on $34bn/yr of Chinese exports starting on 6 July. A 25pc tariff on another $16bn/yr in US exports, including coking coal, would then be imposed by China if the US follows through on threatened tariffs on the same amount of trade.
“Nothing is confirmed at this point because coal has only been earmarked for the second round of tariff imposition,” a US coal sales manager in China said. “But should they kick in, the final import tariff will be nearly 29pc”, including the existing 3pc tariff and customs fees, she added.
And the trade spat could escalate further, after US President Donald Trump yesterday ordered his administration to identify another $200bn in Chinese imports that could be targeted with 10pc tariffs. The duties “will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced,” Trump said. “If China increases its tariffs yet again, we will meet that action by pursuing additional tariffs on another $200bn of goods. The trade relationship between the US and China must be much more equitable.”
The trade tensions sent most commodity futures in China lower today. September coking coal futures closed down by 4pc, or 49.5 yuan/t, at Y1,199.5/t.
The US accounted for only 4pc of China’s total 69.9mn t of coking coal imports in 2017, potentially limiting the direct impact of the tariffs. But any new taxes could reverse a shift in China’s buying towards US coal and instead support imports from Australia, Canada and Russia.
Spot supply disruptions in Australia and quality issues with Russian coals led Chinese trading firms and mills to add US coking coals to their trade books and blends. US supplies work well as blending coals, and are classified as lean coal by most coke makers in China. US coals can make up 5-10pc of a blend, reducing ash levels and the required amount of premium hard coking coals, which can make up 20-30pc of the blend. The bulk of the blend is made up domestic coking coal, of which China produces roughly 600mn t/yr.
A cargo of Pinnacle hard coking coal from the US changed hands at $170/t cfr in mid-May, while a cargo of US brand Buchanan traded at $175/t cfr. Australian mid-volatile hard coking coal was selling at $180-185/t cfr at the same time.
“Some Chinese steel mills recently switched to buying Buchanan because the Russian K10 supply ran into some issues,” a north China steelmaker said. “So these mills are going to face some problems finding substitutes.”
Buchanan coal exported from US east coast ports has been gaining attention, as its low ash content makes it ideal to be used together with high-ash domestic coking coal. Coking coal with lower ash content is available domestically in China, but volumes are limited, the US coal sales manager said. “In the worst case scenario, mills might have to get creative and adjust their blends accordingly to accommodate the higher ash levels,” she added.
The past two months saw an increasing amount of US coking coal being sold into China as consistently high Australian prices made US coal more attractive. But these cargoes, which have already been sold, will not be affected by the new tariffs as contracts would have been finalised by now.
“China’s ministry of commerce is currently having discussions with major steelmakers who import more US coal, to try and find a way forward,” a Zhejiang-based trader said.