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China pledges to buy more US met coal in Phase 1 trade deal

Singapore — A Phase 1 trade agreement signed between the United States and China on Wednesday saw Beijing pledge to buy more metallurgical coal in the next two years from the US.

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China plans to boost its imports of US energy sources, including liquefied natural gas, crude oil, refined products and coal -- including metallurgical coal -- by $18.5 billion in 2020 and $33.9 billion in 2021.

This is part of the interim trade deal where China has agreed to purchase $200 billion worth of US goods and services over the next two years.

Market participants said details on the trade pact were preliminary, and did not immediately address the removal of existing tariffs.

It could be challenging to discuss how both sellers and buyers will fulfill the pact to import more US metallurgical coal, until further confirmation on the removal of tariffs came, sources said.

"It's a good gesture, but a very ambitious one," a sell side source said. "I doubt any negotiations will take place between Chinese buyers and US sellers until the tariffs have been officially removed."

He further added that tariff talks may only take place in Phase-2 of the trade deal.

Currently, US metallurgical coal products to China is subject to 3% import tax, and 25% of tariffs which was imposed in 2018 as the trade war between the two nations escalated.

Even if the 25% tariffs were to be removed entirely, a buy side source said the removal of tariffs should have little impact on Chinese users' procurement.

"Ultimately for Chinese buyers, other origins of coals need to have a competitive edge in prices," she said. "Besides, China's import of US metallurgical coal is so little to have any considerable impact."

For the trade deal to be effective, it would require the Chinese government's support as well, another source said.

'The Chinese government has to introduce some mechanism, perhaps the import quota system or subsidies to help or entice Chinese buyers who are, after all very practical buyers seeking the cheapest price," he said.

According to China customs statistics, the country imported 64.2 million mt of coking coal in 2018, of which only 3% of the imported volume was from the US.

In 2019, total Chinese imports of the US coking coal between January and November stood at 1.1 million mt, down 43% from the same period recorded for 2018, the customs data showed.

US met coal exports and Atlantic spot demand weakened in 2019 as regional steel mills cut output due to lower steel margins and prices, while US coking coal exports were running around 11% lower in 2019 than in 2018, with October trade volume marking a new low.

US met coal prices followed Australian benchmark prices down in the second half of 2019, with higher-cost US mines closing due to low prices and demand.

US high-vol A hit a peak at over $200/mt FOB East Coast in H1 and saw pressure to follow wider seaborne price falls as spot demand weakened.

US coal pricing has generally followed US index-linked pricing terms, with fixed prices on offer for some high-vol B and prompt loading cargoes from time to time.

US high-vol A to high-vol B premiums ranged in a $10-$40/mt band over 2019, with lower premiums in H2 as demand for higher quality high-vol coals faded on weaker steel margins.

High-vol A premiums fell below $10/mt in December as US spot export prices moved well below marginal production costs and domestic contract prices.

S&P Global Platts assessed US Low Vol HCC at $133.00/mt FOB US East Coast on Wednesday.

High Vol A and High Vol B prices were assessed at $140.00/mt and $127.00/mt FOB US East Coast, respectively, on Wednesday.