China Sets Tax on Low-grade Coal Imports; Impact on Indonesia Supplies Unclear

China has announced a 3 percent tax on imports of steam coal with low calorific value but is yet to spell out details of its applicability, leading to uncertainty whether shipments from top low-grade supplier Indonesia will be subjected to the tariffs.

Indonesia is the biggest seller to China of lignite, a form of low-grade coal, with its shipments accounting for 97 percent of China's total lignite imports in 2013 up to end of July.

Moves by China, the world's top coal buyer, to slap an import tariff on lignite may dent sales of Indonesian miners such as Bumi Resources and Adaro Energy and could spark defaults of existing contracts.

China's State Council, the country's cabinet, last week approved a plan to implement a 3 percent tariff on lignite imported from countries under the most-favoured nation trade status, according to a statement from the finance ministry.

The new tax rule came into effect on Aug. 30, according to the statement. Lignite currently enjoys zero import tariff.

The statement did not specify what grades of lignite, in terms of heating value per kilogram, would be affected, although industry sources said Chinese customs statistics classify coal with a calorific value of between 3,800-4,200 kcal/kg as lignite.

However, trade sources questioned if China would be able to impose import tariffs on Indonesian coal, since a free trade agreement between China and the Association of Southeast Asian Nations (ASEAN) has brought import tariffs for lignite to zero since the start of 2012. The import tax on other coal has been scrapped since 2008.

"China is a signatory of the FTA and Beijing has promised zero import tariffs for all ASEAN member countries. I don't think they can arbitrarily change that," said a Shanghai-based coal trader.

The customs office could not immediately be reached for comment.
"The customs office may require importers to provide a certificate of origin for all lignite shipments and those that can provide the documents will be exempt from the tax," said Cao Zhongfang, an analyst with industry portal SXCOAL.com.

"But the smaller Indonesian miners and traders may have trouble providing those certificates at such a short notice, so lot of shipments could be held at up the ports."

Indonesian miners contacted by Reuters said they are still seeking clarity on the matter.

Non-ASEAN countries that export lignite to China include Australia, North Korea, Russia and Mongolia. They account for about 4 percent of China's lignite imports.

NARROWING PRICE ADVANTAGE

Beijing's move to tax imports comes after the domestic coal association lobbied the government in May to ban imports of all low-grade coal, citing the impact on local miners.

China imported 187 million tonnes of coal, including lignite, in the first seven months of 2013. Total lignite shipments stood at 35.97 million tonnes during the period, up about 12 percent from year ago.

Traders said the levy, if applicable to Indonesia, would dent the price advantage of imports.

With imported lignite currently priced at about $47 a tonne on a landed basis, the newly imposed tariff would add about 8 yuan ($1.31) a tonne to its cost, industry sources said.

"Traders may not be able to pass on the extra costs to utilities and that may spark a wave of defaults," said a Guangzhou-based trader. "We're going to wait for more clarity before we book anymore shipments."
Chinese domestic coal, with a heating value of 5,500 kcal/kg, fell 7 yuan from a week ago to 546 yuan ($89.21) per tonne, according to the Bohai-Bay Rim Steam Coal index. ($1 = 6.1195 Chinese yuan)