As the world's largest coal consumer imposes new import barriers, we assess the implications for producers worldwide
In a bid to support domestic producers,China has announced its intention to impose coal import tariffs which will come into effect from 15 October.
We estimate that more than half of China's domestic coal production is operating with negative cash margins and the industry has been lobbying the government for support for over a year.
However, we believe the tariff rates (3% for anthracite, 3% for coking coal, 6% for bituminous coal and 5% for other coal type) will have minimal effect on the domestic industry.
Rates will be applied to the delivered price of coal to China (excluding VAT) and, depending on the coal type, we estimate the tax burden will be US$3/tonne to US$4/tonne, providing scope for only a small increase in domestic prices.
This would support some domestic production at the margin but does not address the root causes of difficulty for China's coal market - oversupply and slowing demand growth.
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The effect elsewhere will be variable – Indonesian miners will escape unscathed as the ASEAN-China free trade agreement states that Indonesian coal is exempt from tariffs. As Indonesia is the largest source of coal imports, support for domestic Chinese mines will be weakened further.
However, there will be some downward pressure on free-on board prices for producers in Australia, the United States, Russia and Canada. This is due to the proportion of tax burden these producers will incur, as well as increased competition into alternative markets.
Although this will continue to squeeze margins, exports to China are a small proportion of total exports from these countries and the full impact of the tariffs will also depend on their ability to switch supply to alternative markets such as South Korea, Japan and India.
Our analysis shows that Australian thermal coal exports to China will be relatively worse off than metallurgical exports as their lower tariff rate and margins will find it difficult to absorb the extra tax burden.
Mongolia and North Korea will be hit hard by China's import tax as China accounts for all the coal exports from these countries and alternative markets are not an option.
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