South Korean power utilities are to target mid-calorific value 5,000 to 5,500 kcal/kg NAR thermal coal in purchase tenders for second quarter shipments including from Australia and Russia and possibly US cargoes, a source close to the Korea market said Tuesday.

Q2-delivery cargo tenders for such mid-range calorific value thermal coal could start to emerge from Korean buyers over the next few weeks, said the source who is familiar with the Korean import market.

Korean utilities’ new purchase strategy is informed by two market factors: firstly, an increase in the Korean government’s consumption tax for imported thermal coal which will favor mid-CV product, and secondly, a shift away from lower-calorific value Indonesian cargoes.

“Mid-CV coal in the range of 5,000 to 5,500 kcal/kg NAR may benefit from changes to the consumption tax,” said the market source.

“Korean power utilities want to secure more mid-to-high CV coal from Australia, Russia and possibly the US, than low CV coal,” he said.

From April onwards, the Seoul government is to apply a Won 6,000 ($5.13/mt) increase to its two-year old consumption tax which is imposed in three bands according to the calorific value of imported cargoes.

For the lowest band, applying to thermal coal with a calorific value of less than 5,000 kcal/kg NAR, is a tax of Won 21,000/mt, which increases to Won 27,000/mt post-April 1.

Mid-calorific value thermal coal, that is 5,000 to 5,500 kcal/kg NAR, attracts a consumption tax of Won 24,000/mt currently that rises to Won 30,000/mt in April.

High calorific value imported cargoes of 5,500 kcal/kg NAR and above are liable for a tax of Won 27,000/mt that becomes Won 33,000/mt from April.

The tiered structure of the consumption tax, with higher rates payable for higher calorific value cargoes on a per metric ton basis, means buyers are incentivized to purchase a greater volumes of mid to higher-CV thermal coal, sources said.

Power utilities in South Korea have taken early action to ensure they secured enough cargoes for delivery in Q1 2017, before the planned increase in consumption tax rates on April 1, said the source.

Another motivating factor favoring the purchase of mid-to-high CV thermal coal relates to Indonesian coal, and some concerns around its perceived quality following tenders for Korean buyers last year, said the source.

Low-calorific value thermal coal from Indonesia was the focus of many Korean purchase tenders last year.

“Korean utilities want to secure homogeneous coal in the low CV range,” said the market source.

Source: Platts