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Chinese government directs steelmakers to raise US coking coal imports: sources

Singapore — The Chinese government has told several large steel mills to increase their year-on-year import volumes of US met coals, as part of the country's attempts to narrow its significant trade deficit with the US, sources told S&P Global Platts.

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Related article -- Uncertainty over how China can loosen policies to support US metallurgical coal imports: sources

Ministry of Commerce officials have approached at least two steelmakers that have previously procured US met coal and instructed them to procure more US exports, sources close to the matter said. The mills were told that their annual imports of met coal cannot fall below volumes imported in 2017.

The mills have said that maintaining such volumes would not be a problem. The Chinese Ministry of Commerce could not be reached for comment. "I think that there is a lot of substance in the US and China coal collaboration," a market source said.

The source indicated that there were signs "that coal will be part of the resolution of the trade dispute," referring to escalating trade tensions between the two countries.

Responses from market sources were mixed. Many were surprised, and expressed skepticism that such state intervention would have traction if met coal prices were to fall into the low $100s/mt CFR China.

However, one source said the idea that the Chinese government could intervene and compel end-users to buy more US coal was not surprising at all. "I don't know why many people are shocked," he said.

The source indicated that the likelihood of spot prices falling to around or even below $100/mt CFR China was low in the next few years given a likely tight market supply balance.

Most steelmakers surveyed indicated, however, that without any supporting clauses, such as providing subsidies to encourage import volumes when prices are not conducive to bilateral trade, the government's request would be difficult to execute. One mining source said it was ridiculous to compel steelmakers to buy unless there were enforceable clauses that compelled buyers to buy and sellers to sell even when the price doesn't make sense for one party or the other.

Without such clauses there would be "loopholes," the source said, adding that tax rebates would be one potential way to try and enforce this. Met coal buyers are "very practical" with regards to coking coal imports, a large steelmaker said, describing the US-Chinese met coal relationship as based "mostly on price."

Despite being the world's second largest exporter of coking coal, the US is essentially a swing supplier to China. Its export volumes to China have seen large swings in the last few years, largely led by spot prices.

US met coal exports to China were 2.08 million mt in 2014 but plunged to zero in 2016, based on Chinese customs statistics, as annualized CFR China spot prices took a dive from $126/mt in 2014 to $95/mt in 2015 before recovering late in 2016. Volumes hit a high at 2.82 million mt in 2017, when prices averaged a relatively high $188/mt CFR China.

On Thursday, Platts assessed CFR China prices up $5.50/mt to $205.50/mt, while premium low vol was up 25 cents to $197.25/mt FOB Australia.


SPILLOVER FOR ATLANTIC, THERMAL MARKETS


Greater US met coal exports to China would likely lead to stronger US prices in the Atlantic basin, according to a market source. In addition, the restart of the second blast furnace in Granite City, Illinois that was announced Wednesday would also mean stronger demand for met coal in the US, which could be supportive for prices in the Atlantic market, which is the key market for US met coal exports.

US met coal exports in 2017 totaled 49.5 million mt, according to the National Mining Association. This volume could ramp up to 60 million mt in 2018, according to the source. In addition, several sources said that the push for greater US exports of coal lie not only in metallurgical coal, but also thermal.

However, most sources indicated that the impact would be more significant for coking coal which accounts for the bulk of US coal exports to China. According to Chinese Customs Statistics, China imported 2.8 million mt of US coking coal and 353,553 mt of US thermal coal in 2017.


US COKING COAL TRADE FLOWS TO CHINA


In 2018 to date, 1.48 million mt of US spot met coals have been traded to the Chinese market, according to Platts data. US premium hard coking coal accounted for 32% of the traded volume, with the balance hard coking coal.

US premium hard coking coals are Blue Creek 7, with a specification of 72% CSR, 21% VM, 9% TM and 9.75 ash, 0.8% sulfur, and Blue Creek 4, with specification of 66% CSR, 25.25% VM, 9% TM, 9.75% ash, 0.8% sulfur.

The most liquid US hard coking coal was Buchanan (40% CSR, 18.68% VM, 7% TM, 5.26% ash and 0.73% sulfur), which accounted for 59% of year-to-date traded volume of US coals to China.

Buchanan is highly prized among Chinese buyers for its low ash and sulfur content as they look to procure raw materials which are less polluting, in line with Chinese environmental policies.

--Elizabeth Low, elizabeth.low@spglobal.com
--Weng Yile, yi-le.weng@spglobal.com
--Edwin Yeo, edwin.yeo@spglobal.com
--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com