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US Trade Agenda Threatens 49% Of US Polyethylene Exports

Business, China, Company Strategy, Economics, Europe, European economy, Olefins, Polyolefins, US
By John Richardson on 25-Aug-2017


By John Richardson

WHICH President Trump will end up setting the final direction of policy? Will it be the President Trump who spoke off-script at a campaign-style rally in Phoenix, Arizona, this week or the President who a day later addressed military veterans in Reno, Nevada, in much more measured tones? Or will the ultimate direction of policy be somewhere between these two seemingly polar opposites? The honest answer is that none of us has a clue.

That’s the challenge that the global chemicals industry faces today. Because America has elected an iconoclast – someone who has pledged to shake-up the old order – but also someone whose White House team includes many mainstream establishment figures, nobody, seven months into this presidency, can be certain of what happens next.

Equally important will be the President’s relationship with Congress. Will it improve or deteriorate from what today already appears to be a very poor relationship? How much of his agenda can the President realistically achieve without the support of Congress, given the separation of powers?

None of this is again meant to take sides in this argument. I will not, at least in this post, express an opinion about the rights and wrongs of any of the many views about the right way forward for America. My job is to instead highlight the risks for chemicals companies so that they can conduct rigorous and broad-enough based scenario planning. This is where ICIS Consulting can help.

The Trade Issue Is the Critical Issue

The global chemicals industry’s business model rests on free trade. Not only has a whole generation of executives grown up knowing nothing but free trade in chemicals themselves. Of equal importance to the established business model is the more or less free-flow of components of finished goods, and the finished goods themselves, backwards and forwards across borders.

What would be the impact of new trade barriers on the chemicals industry? Even if you believe that protectionism will ultimately deliver economic gains for America, and perhaps even other countries as well, nobody can dismiss the risk of a major slump in chemicals sales over the short -to medium-term.

On Wednesday, I discussed how China might have more time than it had expected back in January to achieve its economic reforms, as the President has yet to implement the trade agenda he outlined during his election campaign.

I did warn, though, that we had to watch this space very closely. The President’s Phoenix speech, which he delivered later that very same day, underlined my point. Although he didn’t mention China specifically, these words pointed to what might end up determining the US-China trade relationship:

We are going to protect American industry. We are going to protect the American worker. No longer will we allow other countries to close our factories, steal our jobs, and drain our wealth. We are building our future with American hands, American labour, American iron, aluminium, and steel.

His comments came after last week’s decision to launch an investigation into how China handles intellectual property rights. Earlier this week, the US also asked the World Trade Organisation (WTO) to set up a dispute settlement panel to examine China’s handling of quotas on agricultural products including rice, corn and wheat. This could force China to change its policies or face retaliation if the US complaint to the WTO is successful.

China’s response to the intellectual property-right probe has involved a pledge to do everything necessary to defend the interests of Chinese companies. And in a notable departure from what had been restrained language from China towards rising trade tensions with the US, this is what a Chinese commerce ministry official said yesterday:

The US investigation of China based on domestic laws sabotages the existing international trading system, and has poured cold water on all parties that have been working to promote bilateral economic ties.

In the same Phoenix speech, Trump took direct aim at NAFTA when he said of the ongoing negotiations to restructure the trade deal:

Personally, I don’t think we can make a deal, because we have been so badly taken advantage of. So I think we’ll end up probably terminating NAFTA at some point, OK? Probably.

The Impact on the US Polyethylene Industry

Every chemicals company in every value chain, no matter where they are in the world, is quite obviously vulnerable. Take this down to the level of the US polyethylene (PE) industry and you find that:

  • Canada, Mexico (which are of course along with the US make up NAFTA) and China accounted for 49% of the total of 5.1m tonnes of PE that the US exported in 2016.
  • In H1 2016, China accounted for 7% of total US PE exports. But this rose to 14% in the first half of this year as the volume exported to China jumped from around 220,000 tonnes to approximately 330,000 tonnes, according to Global Trade Information Services data. This reflects the big rise in US capacity, much of which has to be targeted for export because of weak domestic demand growth. And the main destination is China because China is by far the most import export market in the world, both in volume and growth terms.

What would happen to these exports if the US withdraws from NAFTA? And what might also happen if the US ends up in a trade war with China? The US PE industry would surely face new trade barriers that would make exports difficult, if not impossible. That’s the worst-case scenario.

Or let’s take a medium-case scenario where NAFTA stays in place and the US and China pull back from a full-scale trade war, but trade tensions between the US and its trading partners remain elevated. PE end-users in Canada, Mexico and China may look for alternative suppliers to hedge against the constant background threat of the worst-case scenario. In the case of China, this search would be government-driven as it would be part of efforts to build the world’s biggest-ever trading bloc that right now excludes the US – One Belt, One Road.

The best-case scenario is that there are no disruptions to US PE trade flows whilst the industry tries to place all of its new volumes. But no US PE company can afford to build an entire business model around this happening.