BEIJING (Reuters) - Chinese buyers of U.S. ethanol will have to cut imports because of higher tariffs, but eventually will have to return to the overseas market to meet government targets for using the fuel, industry participants and analysts said on Monday.

FILE PHOTO: Corn rests inside of a grain cart during a harvest on a farm near Dixon, Nebraska, U.S., October 26, 2017. REUTERS/Lucas Jackson/File Photo

China said late on Sunday it will slap an extra 15 percent tariff on ethanol imports from the United States, part of its response to U.S. duties on aluminum and steel imports. The previous duty was 30 percent.

The tariffs, effective Monday, will neutralize cost savings from importing cheaper U.S. ethanol versus domestic supply, said three sources that participate in the market. Ethanol, an alcohol typically produced from corn or sugar, is often mixed with gasoline to reduce air pollution from vehicle emissions.

“The price difference is gone. We will suspend imports for now,” said a manager at a private oil refinery, adding that he was considering turning to domestic suppliers for ethanol to blend into gasoline.

That is good news for domestic producers, who are already ramping up output on cheaper corn and government subsidies.

“We have so much corn. We will do absolutely fine if we don’t import ethanol,” said a manager at a major ethanol producer in China.

But analysts said China will probably need to resume imports to meet the government target of 10 percent ethanol content in all gasoline nationwide by 2020.

“Demand for fuel ethanol will potentially explode in 2019 and 2020 and we won’t have enough domestic supplies by then. We might have to turn to overseas,” said Michael Mao, an analyst with Zhuochuang, a commodities consultancy based in the Chinese province of Shandong.

China said last year the new ethanol mandate would boost industrial demand for corn and help clean up its choking smog. It would mean consumption of around 15 million tonnes of ethanol annually, made from 45 million tonnes of corn, according to Reuters calculations.

China’s current ethanol production is around 2.5 million tonnes a year.

It is not clear where future imports will come from. A 30 percent duty on ethanol imports previously levied since January 2017 had already slowed a once-booming trade to a trickle. <ETH/CN>

U.S. imports had recently picked up after prices fell enough to be attractive even with the high duties.

But the new tariffs will close the arbitrage again, boosting the price of U.S. ethanol to around 6,300 yuan ($1,003.58) per tonne after taxes, on par with domestic prices, market sources said.

“There’s not a lot booked past May now and there’s a fear they are not going to book anything forward,” a U.S. ethanol trader said of China.

Chicago Board of Trade May ethanol futures 1ZEK8 fell 2.5 percent or about 4 cents to $1.44 per gallon, the lowest since Feb. 9, as trade resumed after the tariff announcement.

The refinery manager said prices in Brazil, the world’s top ethanol producer, are currently too high for exports to China, but could be an option in future.