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Doubts linger on how China can loosen policies to support US met coal imports

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Doubts linger on how China can loosen policies to support US met coal imports

Uncertainty lingers in the metallurgical coal market as China considers plans to increase U.S. coal imports in order to reduce the significant trade deficits between the two economies, sources said.

While this could be a major development for the coking coal sector, market participants said several issues would have to be tackled first.

U.S. coal exports to China are taxed at a rate of 3% to 6%, and the U.S. accounts for a small percentage of Chinese coking coal imports.

A mining source said China is buying U.S. coking coal now because it is competitively priced compared to Chinese domestic coal or other supply origins such as Australia.

Conversely, U.S. miners "do not necessarily need or want to sell to China [specifically]. They sell to whoever who gives the highest price," the source said.

One option indicated by some steelmaker participants was lifting the import tariff for U.S. coals.

China waives import tariffs for Australia, the world's largest seaborne exporter of coking coal, and Indonesia, a significant thermal coal exporter. A similar agreement would make U.S. coal much more cost-competitive compared to suppliers that are still subject to coal import tariffs such as Canada, Russia and Mongolia.

However, some sources were skeptical because a free trade agreement typically takes years to implement and usually involves a wide range of goods and services rather than one particular product.

Another option would be for China to enforce measures requiring end-users to purchase U.S. coal. This would require the industry associations' support, which would encourage mills to procure more U.S. material.

All participants, however, agreed that if China has a will to increase U.S. coal imports, it will find a way to do so.

Several sources said an increase would likely affect coking coal more than thermal coal, in part because U.S.-China freight costs constitute a higher proportion of the costs for thermal than for metallurgical coal.

In addition, U.S. thermal coals have high sulfur content, which is not what the Chinese market desires, one mining source said.

Amid such concerns in the industry, S&P Global Platts has observed an increase in spot trade volume for U.S. coking coals to China.

In 2017, U.S. coking coal volume to China totaled 2.6 million tonnes, up 310% from 650,000 tonnes in 2016, according to data from the U.S. Energy Information Administration.

According to Platts' spot trade data, U.S. coking coal trade volume to China increased 69.6% on the month in May to 860,000 tonnes.

Coking coal market sources have attributed the rise to low pricing and recent tightness in alternative coking coal supply sources such as Mongolia.

An ongoing dispute between Australian miners and the Aurizon Holdings Ltd. railway has contributed to uncertainty in the global coking coal market, with premium coal prices strengthening since the end of May.

Platts assessed premium low-vol f.o.b. Australia prices up $4/tonne on the week to $197/tonne f.o.b. Australia on June 5 and CFR China prices up by $2/tonne to $200/tonne.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.