“Tariff Retaliation – If you rise, we’ll rise.”
The latest round of tariffs between the US and China has hit a number of different sectors, and the petrochemical industry has not escaped unscathed. They came earlier this month when the Trump administration raised tariffs on $200Bn in US imports from China from 10% to 25%. It wasn’t long before China retaliated, raising tariffs on the $60Bn of American goods from 5%-10% to as much as 25%, with many goods to be taxed at the upper limit from the beginning of June this year. This means the US levies on Chinese goods has increased to $250Bn, which is nearly half of the $506Bn in goods that the US received from China in 2017, while China has slapped $110Bn in taxes against the US, representing 84% of the $130Bn China received from the US.
While China has targeted chemicals and resins from the US, the levies the US has placed against China includes chemicals, resins and the finished products made with them, such as electronics, toys, cleaning products and storage containers. Apart from hurting the pockets of consumers in the US, a recent market report said that these plastic products will mean China will have to produce 4M tpa less of resin if they can’t find an alternative market.
Last year’s round of tariffs saw US exports to China drop 7% while Chinese investment in the US was down 60%. Of the 5,000 products hit, it has been estimated that the trade war between the US and China is likely to affect thousands of chemical industry jobs and billions of dollars. China is the third largest export market for US chemical producers. Last year US chemical exports to China rose 2.7%, having shown double-digit gains in 2016 and 2017. China is a prime market, and with the US bringing on some $200Bn in new production lines, supported by cheap feedstock, there was a large focus on China being the main recipient.
If the trade war continues, the US will have to look at alternative markets to push their product to, but also secure other sources for imports, which can time to build new relationships, ensure product quality and enough quantity to meet demand. Even so, it will be difficult for other markets / countries to absorb the excess product that would now need to find a new home. It is believed some exports may make its way into the European market. At the same time, China will probably shift its chemical purchases to domestic suppliers or other Asian countries, and other nations closer to home. Also worth noting, if the US loses market share in China, it will be difficult to get that back later.
Among the products affected, Methanol has become increasingly significant to the US. Although US MEOH only made up 1% of China’s total imported MEOH volume last year, for the US they have invested in this product for the export market. The US has increased its production capacity from 2.25M tpa as of 2015 to 7.5M tpa with another two plants (totalling 1.1M tpa) planned / under construction and as a result the US has subsequently become a net exporter.
All this also shines a light on investment opportunities as some investors may reconsider where they put their capital in view of export volumes to China dropping off if the trade war shows no sign of abating.
Some traders have been talking of rerouting product through other Asian countries such as Taiwan or Korea to mask the product’s source thereby in principle avoiding the tariff, however the extra operational costs would increase the financial outlay to a level that makes this unattractive.
The problem is no one knows how long this trade dispute will last and whether these tariffs will remain in place for the next few months or next few years. Without knowing this it is difficult to cement contingency plans. [May 2019, SPI Marine].