President Donald Trump listens to U.S. Trade Representative Robert Lighthizer during an event to announce tariffs and investment restrictions on China on March 22.
Retaliatory Chinese tariffs on U.S. coal may affect a relatively small sliver of the sector's overall coal exports but could be one of many potential blows to a sector politically important to President Donald Trump.
After the U.S. imposed a 25% tariff on $50 billion of goods from China, the country fired back June 15 with its own tariffs on U.S. products, including coal, set to take effect July 6.
China imported about 3.2 million tons of coal from the U.S. in 2017, up significantly from 995,901 tons in 2016, according to U.S. Energy Information Administration data. That is the most coal the U.S. has sent to China since 2013, but still represents only 3.3% of U.S. coal exports.
"Maybe five years ago this would be a really big concern for the U.S. guys, but the market is pretty well diversified," said Charles Dayton, vice president of market analytics at Doyle Trading Consultants.
While the impact of Chinese tariffs alone could be fairly minimal to coal export levels, China is not the only country upset over U.S. trade policy. Canada may impose tariffs on U.S. coal as tensions between the countries rise, and other global trading partners importing significant amounts of U.S. coal have said they are forming retaliations to Trump's tariffs on steel and aluminum.
"If this sets a precedent, it is absolutely something to be concerned about ... the export market is by order of magnitude a bigger market for U.S. producers," Dayton said in an interview. "This can't be 'Make America Great Again, we're just going to use coal for domestic consumption,' because [the capacity to do so is] just not there."
The impact on U.S. coal is less significant in scale than other affected industries such as crude oil, Shirley Zhang, principal analyst on Asian coal markets for Wood Mackenzie, said in a commentary published June 18. In the first quarter, about 1.7% of U.S. coal exports went to China, she said.
"U.S. coal was never a cost-competitive supplier into China on a delivered quality adjusted basis, unless there is a major unexpected supply disruption from Australia," Zhang wrote. "Having said that, current high coal prices have encouraged more high-cost U.S. supply into the Pacific market amid domestic demand weakness."
A higher tariff on U.S. coal going to China means the sector may have to redirect cargo to places like India, Europe, the Middle East, Africa, Russia and countries around the Caspian Sea to get better margins, Zhang said.
In 2017, just under 90% of the coal that went to China from the U.S. was metallurgical coal. But the sector hoped Trump's maneuvers on trade might open up opportunities in China for both steam coal for power plants and metallurgical coal for steelmaking.
Chinese officials had reportedly considered increasing purchases of U.S. coal to reduce a trade deficit and ordered large steel mills to increase their imports of U.S. metallurgical coal. West Virginia Coal Association President Bill Raney told S&P Global Market Intelligence in late May that the U.S. Department of Commerce contacted his group about potential Chinese interest in 7 million to 8 million tons of U.S. steam coal.
"Certainly we're hopeful it isn't going to affect that," Raney said in an interview June 18. "I'm hopeful it will not be a major impact, that we'll ship as much coal as we did in 2017 and hopefully more."
On the other hand, some coal producers have said the economics do not make enough sense to be worried much about Chinese demand anyway. Ramaco Resources Inc. Executive Chairman Randall Atkins said in a late May interview that it was unlikely China would become a "sustained, long-term buyer of met coal" and he dismissed the notion China was likely to chip away at its deficit with increased coal purchases.
Companies such as Warrior Met Coal Inc. and Coronado Coal LLC have benefited most from China's increased interest in U.S. metallurgical coal so far, according to a recent Seaport Global Securities note.