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US miner Arch Coal expects 2 mil-3 mil st hard coking coal demand from Section 232: Seaport

London — US miner Arch Coal expects additional domestic coking coal demand of 2million-3 million st as a result of Section 232 import tariffs on steelspurring higher steel output, Seaport Global said after meeting companyexecutives.

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"The tariffs could eventually add around 5% to overall US met coaldemand, all of which will be fed by US producers," Seaport analysts led byMark Levin said.

"Increased US consumption might enable producers to get pricesdomestically that are at narrower discounts to seaborne ones," they said. "Thereal key, though, will be whether Section 232 brings meaningful retaliationfrom other countries and how that affects the overall market."

Export spot US coking coal prices tracked by S&P Global Platts haveoutpaced average US domestic contract pricing since 2015, according to dataand estimates calculated by S&P Global Platts.

A key component in this comparison is railing and terminal fees, toestablish coal pricing netback at the mine for comparison. Seaport expectsrates to have increased recently.

Railroads "are generally capturing 15-20% of the value of the product,"which would suggest current rail rates including port charges in themid-$30s/st, up from closer to $30/st in 2017.

Arch expects potential 1-2%/year average global coking coal demand growththrough to 2025, which would lead to around 40 million st of additional cokingcoal supply, Seaport said, citing the company's senior vice president forstrategy Deck Slone.

Arch was not immediately available to comment out of US office hours.

Slone expects Australia will have to play a critical role in expandingproduction to meet demand, and is concerned about the lack of projectsglobally in current pipelines to ensure sufficient supply, it said.

Changes in Chinese import met coal appetite may, on the contrary, be arisk for met coal prices should a sudden drop hit the seaborne market'smarginal supply and demand balance.

"BHP Billiton and many other larger miners don't seem to be spending muchgrowth capital on their met coal businesses," Seaport said.

"With their increasing emphasis on using higher quality met coals tomaximize coke times/minimize environmental issues and the coastal location ofmany of their larger blast furnaces, he thinks this is unlikely, but it is arisk given the unpredictability of Chinese policy decisions."

Arch's high-vol A Leer Mine, which has a stated reserve life of eightyears, is considering developing an adjoining area in a $450 million projectproviding 3 million st/year, Seaport said.

The permitting process is ongoing and will take time, with productionlikely taking three years to start after investment approval, it said.

--Hector Forster, hector.forster@spglobal.com

--Edited by Jonathan Fox, jonathan.fox@spglobal.com