US Polyethylene: Even Without Trade War, $6.2bn Of Sales In China At Risk

Business, China, Company Strategy, Economics, Environment, European petrochemicals, Olefins, Polyolefins, US

By John Richardson

AS THE number of exemptions from the new US steel and aluminium tariffs grow for Americas “friends”, the direct impact of the tariffs might end up being fairly minimal. So far, Canada, Mexico and Australia have been let off the hook.

But the national security basis upon which the tariffs have been introduced could open up a Pandora’s Box of likeminded measures.  As it is almost impossible to disprove a claim that national security has been damaged by cheap imports, what is the point in complaining to the World Trade Organisation (WTO) if the US and other countries introduce new tariffs on that basis? The WTO can only adjudicate on clear evidence.

You can thus easily imagine how this might play out:

  • President Trump‘s next step is to follow through on his threat to levy new import tariffs on a wide range of Chinese exports to the US. This is in response to US claims that China has stolen intellectual property. He also makes it harder for China to get access to US intellectual property rights by introducing tough new rules on Chinese acquisition of US companies.
  • China responds by using national security to exclude US companies from many of its markets.
  • Other countries also adopt national security as a justification for shutting out US exports.
  • We end up in a full-blown global trade war with major negative consequences for the global economy and US petrochemicals and polymer exports.

China may respond in this way because at this stage in its economic development it needs more, not less, access to intellectual property rights. The reason, as is the case with most things in economics, relates to demographics.

China and its middle-income trap

The number of babies born in China during the One Child Policy was 400m lower than would otherwise have been the case, according to Chinese government research. For this reason, China is experiencing the same pattern of population ageing as in the West. The One Child Policy was in place from 1979 until 2016.

In coastal rich China, wage costs are rising because the population is ageing. This makes lower-value manufacturing no longer competitive. China has thus fallen into what is called a middle-income trap. It has to raise the value of its manufacturing and service industries by enough to escape the trap otherwise history suggests that its economy will stagnate.

Because of low inland income levels, China has insufficient tax revenues to meet rapidly increasing healthcare and pension costs. For example, 36% of the Chinese population – 500m Chinese citizens – still live on less than $5.50 a day, according to the World Bank.

The gap between tax revenues and government liabilities is at risk of widening even further if China loses too much low value manufacturing to other countries, whilst not sufficiently growing its presence in higher-value manufacturing and services.

China has for many years been accused of breaching intellectual property right rules. But because of China’s need to escape its middle-income trap, it now has to push even harder to gain overseas technological knowhow.

This pressure is building when, as I said, the US is poised to make China’s access to intellectual property much harder.

In a few days or weeks, the threat of a global trade war may fade into the background again – just as it did in the months immediately after President Trump’s inauguration speech. But the president sincerely believes that protectionism works and has held these views for many years. I thus believe it could well be only be a matter of when not if a global trade war happens.

There is no back to normal

Let’s assume that everything does quieten down again. China is still likely to accelerate its Belt and Road Initiative (BRI) as a hedge against the risk that President Trump does end up triggering a trade war.

This will involve China sourcing most of its imports, including petrochemicals, from the countries it regards as its or friends or economic partners. These countries are mainly within the BRI region.

The BRI comprises huge infrastructure investments by China across some 70 countries that account for around 4.4bn people and 40% of global GDP, according to the World Bank. The BRI may also become the world’s biggest-ever free trade zone.

Although Japan and much of the EU aren’t in the BRI, China may move closer to these developed economies in order to source the intellectual property it has to source if it is to escape its middle-income trap. This would be another hedge against losing access to American intellectual property.

In the end, therefore, the US could find itself economically isolated from China whether or not a trade war actually happens.

The effect on US PE revenues

Let’s think through what could be the financial implications for US P$ industry.

In 2017, the US exported 601,546 tonnes of PE to China, 5% of the country’s total PE imports. Let’s assume that it maintains this market share in 2018. This would amount to 587,350 tonnes out of our estimate of total imports of around 11.7m tonnes.

Using an average of ICIS Pricing CFR China commodity grade PE prices during the 12 months from March 2017 until February.

Let’s next assume that the US maintains 5% share in China’s PE market during the seven years from 2018 until 2025, and that the average China CFR PE price from March 2017-February 2018 ($1,599/tonne) applies through this period.

The seven years from 2018 until 2025 are when we expect total US PE export availability to dramatically increase on all of the new capacity additions. In 2018, we expect exports to total 2.8m tonnes. This will reach 7.9m tonnes in 2025.

These end-results are in the chart at beginning of this blog post. US sales amount to $681m tonnes in 2018 and climb steadily as China PE imports increase. In total over the seven years, $6,2bn of revenue is under threat.

These numbers will of course be wrong, but they do give you an idea of the scale of the risk.

No exporter can afford to lose out in the China market because of its outsize role in global PE deficits. In 2018, for example, we estimate that China will account for 52% of the 22.5m tonnes that will be imported by the regions and countries that are in deficit (where consumption exceeds production). Europe will be in distant second place at 19%. This trend isn’t going to change.

US PE exports would very probably not stop overnight, even in the event of a full-scale US-China trade war. The financial damage in the China market would instead gradually build up, forcing US PE producers to either cut back on operating rates or more aggressively sell material in smaller markets such as Europe and Latin America

I must again stress that I am not positioning myself on either side of the debate about President Trump’s approach to international trade.

But there is no doubt that his approach is radically different from the approach of every other president since the Second World War. When something radically different is attempted, nobody can be certain of the outcome. And with great uncertainty always comes extreme downside risks.

PREVIOUS POST

Global Trade War: $12.4bn of US Petchems Exports At Risk

09/03/2018

By John Richardson THE CUMULATIVE negative effect on global GDP as more and more...

Learn more
NEXT POST

China Polyethylene: Inland Growth And Internet Sales Versus Threat From Sustainability

13/03/2018

By John Richardson THE ABOVE CHART uses the same approach I used in late Februar...

Learn more
More posts
Further collapse in China auto sales underlines radical change in petrochemicals business model
23/09/2019

By John Richardson HAVE FEEDSTOCK will build has been the route to success for many years in the pet...

Read
European petrochemical markets keeping calm and carrying on in light of Saudi attacks
19/09/2019

Here is a guest post from my very good ICIS colleague, Matt Tudball, our head of European Markets, w...

Read
Global PE market to remain long despite Saudi cutbacks caused by drone attack
17/09/2019

By John Richardson TRADERS lucky enough to be holding long positions in PE ahead of the 14 September...

Read
Risk of stagflation and recession from drone attack on Saudi oil facilities
17/09/2019

By John Richardson ANY major change in US government foreign policy always carries major risks becau...

Read
Drone attack on Saudi oil facilities: Substantial investment required to avoid a repeat
16/09/2019

The views expressed below are personal and do not express the views of ICIS Here is a another blog p...

Read
President Trump can only cause major economic damage by beating China, unless he has a time machine
12/09/2019

The views in this blog, are, as always, my own personal views and don’t reflect the views of I...

Read
Unsustainable boom in China auto market ends as sales of new vehicles move permanently lower
08/09/2019

By John Richardson THERE IS a big temptation when making forecasts of becoming too excited about the...

Read
Global PP demand could be 81.5m tonnes less than forecast in 2019-2028 as China Debt Supercycle ends
05/09/2019

By John Richardson SOME PEOPLE argue that despite the rapid rise in Chinese consumer debt over the l...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more