trending Market Intelligence /marketintelligence/en/news-insights/trending/kvxdmwsxazoarvwbewfdlq2 content esgSubNav
In This List

'Unintended consequences': Tariffs may boost US coal use but threaten exports

Podcast

Next in Tech | Episode 49: Carbon reduction in cloud

Blog

Using ESG Analysis to Support a Sustainable Future

Research

US utility commissioners: Who they are and how they impact regulation

Blog

Q&A: Datacenters: Energy Hogs or Sustainability Helpers?


'Unintended consequences': Tariffs may boost US coal use but threaten exports

SNL Image

A worker at ArcelorMittal's integrated steelmaking facility on Lake Michigan in Indiana walks across an area where coal is turned into a coke product used to make steel. New tariffs announced by the Trump administration aim to take pressure off U.S. steel producers, but the move could have both beneficial and adverse consequences for U.S. coal producers.
Source: S&P Global Market Intelligence

New steel and aluminum tariffs may benefit U.S. coal producers' domestic sales, but the move also threatens a recent improvement in overseas demand for metallurgical coal.

President Donald Trump's March 8 order enacts a 25% tariff on steel imports and a 10% tariff on aluminum imports. The administration granted temporary exemptions to Mexico and Canada pending further North American Free Trade Agreement talks and left the door open to negotiating exemptions for other countries.

Tariffs on imported steel are "clearly positive" for producers like Arch Coal Inc. and Ramaco Resources Inc., wrote Jeremy Sussman, head of U.S. equity research for metals and mining at Clarksons Platou Securities. If the tariffs get the U.S. steel industry back up to 80% capacity utilization as intended, Sussman said that could mean a "double-digit percentage" increase in demand for metallurgical coal. Two blast furnaces alone, he points out, could increase domestic demand by up to 3.5 million tonnes per year.

Ramaco Resources Executive Chairman and Director Randall Atkins warned that "the law of unintended consequences will be alive and well" as it is with most government interventions in markets.

"The question would also be how much of a shortfall would occur on exported coal to foreign steel groups forced to cut back production headed to the U.S.," Atkins told S&P Global Market Intelligence. "That is a wild card given that in many cases they are also supplying steel to a strengthening home market in Europe, etc."

According to the U.S. Energy Information Administration, U.S. coke plants consumed about 18.8 million tons of coal in 2017. U.S. producers shipped about 55.3 million tons of metallurgical coal abroad.

"I worry about countermeasures; I worry about if the Europeans are having a difficult time exporting steel, then their demand for U.S. coal could actually decline," said Andy Blumenfeld, head of market analytics for Doyle Trading Consultants and a former Arch executive. "This, of course, could have probably a bigger impact on U.S. metallurgical coal than any pickup on the domestic side."

David Stetson, CEO of metallurgical coal producer Alpha Natural Resources Inc., said in a March 9 interview that a lack of clarity on how tariffs might work and who will be exempted makes it difficult to determine exactly how the tariffs might affect U.S. coal producers.

"We've gotten some very strong and positive feedback from our U.S. customers. As you would expect, we received some less than positive news on the international front as everyone is trying to digest the tariffs," Stetson said.

Before the tariffs were finalized, Brazil's Minister of Industry, Foreign Trade and Services issued a statement expressing extreme concern over the policy. The statement said the country is the largest importer of U.S. metallurgical coal and is prepared to take action to preserve its interests in response to Trump's tariffs.

In a statement made before Trump's action was announced March 8, the largest steel producer in North America, ArcelorMittal, said significant steelmaking overcapacity and a rise in exports from several steel-producing nations "legitimizes governments worldwide taking a tough approach to addressing unfair trade practices."

"The greater need, however, is to create a truly sustainable global steel industry, and the only way to do this is for steel-producing nations around the world to work together to address global overcapacity," ArcelorMittal, which is also active globally, said.

Aluminum tariff could spur domestic thermal demand

Matt Preston, research director of North America coal markets at Wood Mackenzie, said the aluminum tariff could potentially provide a significant boost for thermal coal.

"If a couple of new aluminum smelters opened up it would be a big draw on electricity," he said.

Century Aluminum Co. announced in a release that it would be restarting its idled aluminum smelter in Hawesville, Ky., once tariffs are put into place. Blumenfeld said the Century operations will require a lot of electric power in a region of western Kentucky heavily supplied by coal-fired generation.

The tariffs have no expiration date and latitude for the president to make changes and exemptions to the tariffs ensure tweaks can be made to the policy to increase the desired effect of restarting U.S. aluminum production, a Century executive said on a March 12 call.

"This administration appears to understand the U.S. aluminum market well, and we believe they have designed a structure that will result in U.S. production increasing," Jesse Gary, executive vice president, general counsel and secretary at Century, said.

Alcoa Corp. has been working to restart three of its five potlines at its Warrick aluminum smelter in Indiana by the end of the second quarter. While the Warrick restart was planned before the tariffs were announced, the operation draws from its own coal-fired power plant fed by White Stallion Energy's Liberty mine.

"It's a domino effect. The other plants in the region will also pick up additional generation. And most of that in the area is coal-based," Blumenfeld said.