LAUNCESTON, Australia (Reuters) - If China does seek a way to retaliate against U.S. proposals to impose import curbs on steel and aluminium, then targeting President Donald Trump’s favoured coal would be tempting.
One of Trump’s key campaign promises in the 2016 election victory was to end the war on what he termed “beautiful, clean” coal. Figures released last week by the U.S. Energy Information Administration (EIA) suggest he has met with some success.
U.S. coal output surged the most in 16 years to reach 773 million short tonnes, equivalent to about 701 million metric tonnes, in 2017, the EIA said on Feb. 16.
Coal miners produced about 40.8 million tonnes more in 2017 than in 2016, the EIA said.
So far, so good for Trump. But the problem is that virtually all of the good news for U.S. coal producers is on the export side - and this is mainly a China phenomenon.
U.S. exports are expected to have risen 58 percent in 2017 from the prior year to about 86.2 million tonnes, according to the EIA, with volumes to Asia nearly doubling to about 28.1 million tonnes.
These figures largely tally with ship-tracking and port data compiled by Thomson Reuters Supply Chain and Commodity Forecasts.
Seaborne U.S. coal exports were about 79.4 million tonnes in 2017, up from 64.1 million in 2016, according to the vessel data.
China bought 5.95 million tonnes of U.S. coal last year, more than double the 2.8 million of the prior year, while India remained the top Asian destination, with imports of 13 million tonnes, up from 8.7 million in 2016.
Japan remained slightly ahead of China with imports of 6.9 million tonnes of U.S. coal in 2017, up from 5.2 million the prior year, according to the vessel-tracking numbers.
These figures don’t make it explicit that China is the main driver behind the burgeoning U.S. coal exports, given that the world’s largest importer of the polluting fuel only bought 3.15 million tonnes more from the United States last year than in 2016.
However, the main dynamic driving coal markets is Chinese import demand, and the 6.1 percent gain in its imports in 2017 from the prior year has helped prices for both thermal and coking coal remain at robust levels.
The Asian benchmark thermal coal price, the Newcastle Weekly Index ended 2017 at $103.88 a tonne, up 10 percent from the end of 2016.
While this represents a solid gain, it’s worth noting that the low for 2017 was $72.42 a tonne, and that the index spent the majority of the year trading above $80 - something it hadn’t done since 2013.
For U.S. coal exports to be competitive in Asia, and also in Europe, a thermal coal price of at least $70 a tonne is required, given the cost of mining, inland transportation and shipping in the United States.
Chinese import demand has ensured that thermal coal prices have remained in the sweet spot for U.S. producers, allowing them to be competitive in Europe against exports from Colombia and South Africa, as well as in Asia.
The relatively high prices for coking coal, used in steel-making, has also helped U.S. exporters of this higher-quality fuel, especially in India where they compete against supplies from top exporter Australia.
The outlook for U.S. coal exports is largely price-dependent, and this in turn is largely a function of how much China imports.
If China comes close in 2018 to importing the 270 million tonnes it did in 2017, then prices are likely to hold up, providing U.S. miners with the opportunity to maintain, or possibly even grow their exports.
The current balance of risks is that China’s coal imports will moderate somewhat this year as the country ramps up domestic output and continues its switch to less-polluting fuels such as natural gas.
If this is the case, then prices may drift lower toward the level where U.S. exports start to struggle, especially in Asia.
There is also no current suggestion that China would retaliate against the United States by targeting coal, should Trump accept the recommendation of the U.S. Commerce Department for a slew of curbs and tariffs on steel and aluminium imports from a variety of exporting countries.
So far the Chinese response has been limited to saying the U.S. trade review report is “baseless” and that it will take steps to protect its interests if the final decision affects China.
While a tit-for-tat trade war is unlikely to be in either the interests of China or the United States, putting barriers on U.S. coal imports would be a powerful signal from Beijing, aimed straight at Trump’s heartland.
Editing by Kenneth Maxwell