|President Donald Trump listens as U.S. Trade Representative Robert Lighthizer speaks during a March 22 event to announce tariffs and investment restrictions on China. Although China is a major player in international coal markets, U.S. coal producers may not have much to worry about from what some worry could turn into a trade war. |
Source: Associated Press
The U.S. coal industry, a sector key to President Donald Trump's campaign and policy platforms, would likely be shielded from direct impacts of a trade war with China.
While China exerts significant influence over global thermal and metallurgical coal markets, the country is not a primary market for U.S. coal producers who have been increasingly leaning on export markets for new sales opportunities.
The U.S. exported 40.5 million tons of metallurgical coal used in steelmaking in 2017, with about 2.5 million tons of that going to China, according to data from the U.S. Energy Information Administration. Exports of U.S. steam coal, primarily used for electricity generation, totaled 28.3 million tons in 2017, but only 265,663 of those tons were shipped to China.
Seth Schwartz, president of Energy Ventures Analysis, said any tariffs China might place on U.S. coal would likely have 'little to no impact."
"Coal is a commodity, which means that its trade is generally fungible — to the extent that China places a tariff on coal imports from the U.S., the U.S. coal would be exported to other markets such as Japan, India, [South] Korea and Brazil, while coal from other countries, primarily Australia, the largest exporter, that would have shipped to these countries would be diverted to China," Schwartz said.
Trump signed orders in March imposing tariffs of 25% on steel and 10% on aluminum imports, though several key trading partners were granted temporary exemptions. The exemptions may have averted potential blowback from countries that sell steel to the U.S. but buy metallurgical coal from the U.S, such as Brazil. Later, the Trump administration announced tariffs on $50 billion of U.S. imports from China, a move China retaliated against with a temporary list of U.S. items to face a reciprocal tax coming into China.
The stock market sank on fears of a trade war but soon improved based on reports the countries could work together to avoid that outcome.
Ramaco Resources Inc. Executive Chairman and Director Randall Atkins said there are "too many bank shots going around the pool table to make a prediction" on exactly how tariffs could affect the global market, though the impact would likely not be dire. He expects metallurgical coal exports to remain strong in 2018 and sees strong demand ahead for the next 18 months, at the least.
"Everybody talks about a trade war, but I don't think that train wreck happens very quickly, if at all," Atkins said.
Corsa Coal CEO George Dethlefsen speaks to workers at a new Corsa mine in Pennsylvania in June 2017. The company says it is already seeing increased demand for domestic metallurgical coal after tariffs were ordered by President Donald Trump. The mine's opening was cheered by Trump, whose campaign platform included reviving the U.S. coal sector.
Dan Klein, a coal analyst with PIRA Energy Group, an analytics and forecasting unit of S&P Global Platts, said if China was to significantly deflate overall import demand, that could drastically lower the price of coal on the international market and push most U.S. producers "out of the money." While he expects China's coal import demand to drift lower in the near future anyway, he said dramatic action aimed at the relatively small amount of coal flowing from the U.S. to China is unlikely.
"That seems to be a very off-the-wall kind of way to go about things if you're looking to specifically target the coal industry," Klein said.
Atkins said even if China were to crank up production from the country's mines and reduce imports of metallurgical coal, that would more likely hurt Australian producers than those in the U.S.
"As far as we're concerned, if somebody is selling [U.S.] coal to China, they are probably doing something wrong because there are too many other good places to place it," Atkins said.
Meanwhile, U.S. coal producers stand to benefit from sales to domestic steel producers under Trump administration policies. Schwartz said the net impact of tariffs on imported steel in the U.S. will be to increase domestic production and reduce steel imports.
"U.S. coal producers supply virtually 100% of the met coal for the domestic U.S. and Canadian steel market, but only 15% of the world trade in met coal," Schwartz said. "Thus, shifting steel production from U.S. imports to U.S. production would increase domestic coal demand by much more than it would reduce world demand for U.S. coking coal."
Both Ramaco and Corsa Coal Corp. said on March earnings calls that domestic demand for metallurgical coal would likely be increased by Trump's orders. Corsa said it is already seeing more interest from buyers, and Ramaco told analysts it expects the tariffs could create an additional demand of 2 million to 4 million tons of metallurgical coal in the U.S.
S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.