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Potential 25% China tariff on US coking coal sparks short-term concern

Singapore — A potential 25% tariff on US coking coals to China may have littlelong-term impact on most Chinese buyers, though concern about defaults onrecent trades is mounting, market sources said.

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Earlier in June, the Chinese Ministry of Commerce said US exports toChina may face additional 25% tariffs. The additional tariff may include UScoking coal exports to China.

This is an abrupt about face which could hit several Chinese buyers,particularly those that have bought US coking coal.

Earlier in June, at least two major Chinese steel mills had beenapproached by Ministry of Commerce officials, and were asked either tomaintain or increase their imports of US coal in a bid to reduce the US' tradedeficit with China. There was also a certain amount of expectation on the partof Chinese buyers that the 3-6% import tax imposed on US coking coals might beabolished.

As a result, sellers reported increased inquiries from Chinese buyers,with a greater variety of US coking coal brands surfacing in China.

While there is uncertainty about the 25% tariff being implemented, aswell as its potential timing, market participants are expecting it to beimposed in July, shortly after US tariffs on Chinese goods are due to takeeffect on July 6.

Market participants also said that the tariff is expected to be paid bythe importer and would be imposed when the cargoes are at Chinese customs.

HUGE COSTS FOR US COAL BUYERS

There is concern from traders and buyers who had earlier purchased UScoking coals in May to June. The voyage from the US to China takes about 40-45days, which means that Chinese buyers who bought their cargoes then could faceadditional tariffs.

A source at a Chinese mill and US coking coal buyer said that should thistariff come about, he would never buy US coal again, and previously mostChinese buyers procured US coals based on cost-effectiveness. Finding areplacement was easy, he added.

While several sources were concerned that that with such a steepadditional cost, there may be buyers who choose to default on cargoes, thesteel mill buyer said that it was unlikely a large mill would risk itsreputation for a single cargo.

However, there might be a chance of this happening with smaller players,he said.

As for one US coal seller, he said that should this take place, it wouldnot affect overall US coking coal exports as China was not a major buyer.However, it could mean that he would no longer be able to sell US coal.

Another seller of US coal said that he is currently holding back fromselling.

Market participants also said that US coking coal volumes to Chinaremained small, and the impact of additional tariffs would likely be minimal.

Should US coking coal sellers divert their cargoes elsewhere, this maypresent opportunities for low ash low sulfur coking coals from other origins,one cokemaker said. US met coal exports in 2017 totaled 49.5 million mt,according to the National Mining Association.

According to Chinese Customs Statistics, China imported only 2.8 millionmt of US coking coal, 353,553 mt of US thermal coal and 21,000 mt of USmetallurgical coke in 2017.

--Elizabeth Low, elizabeth-low@spglobal.com

--Weng Yile, yi-le.weng@spglobal.com

--Edited by Jonathan Dart, jonathan.dart@spglobal.com