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Rising trade tensions with Canada could put US coal in the crosshairs

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Rising trade tensions with Canada could put US coal in the crosshairs

SNL Image

President Donald Trump smiles during a news conference with Canadian Prime Minister Justin Trudeau in the East Room of the White House held Feb. 13, 2017. Recent spats over trade, however, threaten business relationships between the two trading partners.
Source: Associated Press

U.S. coal destined for Canada could end up in the crosshairs amid rising tensions between the two allies.

About 5.3 million tons of U.S. coal was exported to Canada in 2017, according to U.S. Energy Information Administration data. The figure represented about 5.5% of U.S. coal exports during the year as increased export demand has buoyed an industry with a domestic customer base in secular decline.

Reaction to heated rhetoric and trade impositions from the U.S. president could end up slowing down an improving U.S. coal sector — an industry supportive of the administration and often praised by Trump.

Business groups have banded together calling for legislation blocking President Donald Trump from imposing tariffs on countries without congressional approval. Trump recently called Canadian Prime Minister Justin Trudeau "meek" and "very dishonest and weak" after the leader reacted negatively to Trump citing national security in the imposition of tariffs on global trading partners, including Canada.

"There is a certain amount of shock and there is a certain amount of puzzlement as to why Canada is a national security threat," Clifford Sosnow, an Ottawa-based partner with law firm Fasken Martineau DuMoulin LLP and a former in-house counsel for Canadian foreign affairs and trade governmental bodies, said in an interview. "My own view is that it is hard to understand what the end game is."

Tariffs could lower the appetite for U.S. metallurgical coal from countries such as Canada that import significant amounts of the type of coal used for making steel. However, tariffs could also boost steelmaking capacity in the U.S. and support increased domestic sales, meaning the issue "cuts both ways for the sector," said National Mining Association spokeswoman Ashley Burke.

"Anything that could potentially chip away at the gains we've seen would be of concern," she said. "But on the other hand, any boost to domestic steelmaking is a positive."

While the relatively small and declining amount of thermal coal exported to Canada would likely continue to flow without intervention from the government, about 4 million tons of metallurgical coal could be in jeopardy from reduced steel production or be exposed to potential retaliatory tariffs issued by the Canadian government, said Matt Preston, research director for North America coal markets for Wood Mackenzie.

With a relatively small U.S.-Canada customer base for metallurgical coal, actions affecting Canada's share of U.S. metallurgical coal consumption could have a major impact on trade to those facilities.

"This is a big chunk of that total domestic demand," said Charles Dayton, vice president of market analytics for Doyle Trading Consultants. "If you start messing with pretty significant tariffs, which they appear they want to do, I'm really worried about the ripple effect on some of the coking coal producers that are incumbent in that business."

Another target, one Canadians have already threatened in response to previous Trump tariff announcements on Canadian softwood lumber, could be coal traveling through Canada but destined for other countries. Roughly 5 million to 10 million tons of U.S. coal is exported annually through Canada's western ports, Preston said.

"I suppose in an all-out tit for tat trading war there could be tariffs or taxes placed on that coal or even denied access, but that would be extreme and we would not expect that in the near to mid-term," Preston said. "In the long term, it might happen but probably related to some form of climate change initiative rather than the tariff issue."

However, Dayton said the thermal coal moving through Canada could be seen as "fairly low-hanging fruit" for Canadians to strike back against Trump's actions on trade.

"I'd be pretty concerned on the thermal side that they would try to do something to that effect," Dayton said.

In response to a Canadian official threatening a potential lockout from access to export facilities in retaliation to softwood tariffs, one analyst said in early 2017 that "President Trump may be good for coal, but we aren't so sure he is good for Cloud Peak Energy Inc." The company has been depending on access to export markets, particularly to meet growing interest from Asia.

The significant amount of energy that flows between the countries, whether it's coal, natural gas or electricity, could make both world leaders hesitant to start putting restrictions on the sector, said Steve Piper, research director for energy at S&P Global Market Intelligence. Still, if Canada does restrict coal coming in from the U.S., it could have a big impact on an industry that has suffered significant blows in recent years.

"It wouldn't be the end of the world if that outlet got restricted, but obviously the coal segment needs good news everywhere it can find it," Piper said.