China tariffs: Quantifying The Impact On US Petchems And Energy

Business, China, Company Strategy, Economics, Methanol & Derivatives, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US

By John Richardson

PRESIDENT Trump believes he is winning the trade war with China because of the much greater strength of US stock markets versus their Chinese counterparts. At the start of last week, for example, the two major Chinese indexes had lost a quarter of their value since the start of the year whereas the S&P 500 was nearing a fresh record high.

But what if China has instead achieved the upper hand in this battle because of its extremely skilful targeting of the biggest driver of the US economic recovery – energy and petrochemicals?

Twenty five percent tariffs on US crude and liquefied natural gas are set to deliver a very significant blow to the US economy.

China has also extended its range of 25% polyethylene (PE) import tariffs to cover all grades of US high-density PE (HDPE) and nearly all the grades of US linear-low density PE (LLDPE), just as US PE capacity is ramped up. This will badly undermine the earnings of the US companies that have built new plants.

A second wave of new US PE plants, where steel has yet to be placed in the ground, may also now be in jeopardy if the tariffs, which are due to be implemented from 23 August, stay in place for long enough.

US methanol imports will also face 25% tariffs from 23 August. This is at a time when the US methanol industry is undergoing its biggest-ever expansion, and when China is set to become by far the biggest methanol import market.

The US methanol industry is certainly not mincing its words about its opposition to the trade war. In a press release last week, the US methanol industry association, the Methanol Institute, wrote:

Each new methanol plant built in the US drives capital spending of $1.1 billion and an economic ripple effect worth $1.5 billion.

The US is now making a critical transition from being a net methanol importer, to becoming a net methanol exporter, and one of the principle potential markets for US methanol exports is China.

 The potential for high import tariffs placed on US methanol by China could lead to a dramatic slowdown in the domestic methanol industry’s resurgence, at a cost of investment, jobs and tax revenue. At a time when the U.S. is poised to significantly expand methanol exports to China, the imposition of tariffs could have the perverse impact of halting this positive trade.

The immediate negative economic impact on the US energy and petrochemicals industry is very easy to quantify:

  • In the 12 months from June 2017 to May 2018 (May 2018 is the latest trade data I have available), the US exported 244,520 tonnes of HDPE to China. Multiply this by the average ICIS CFR China price for all the major grades of HDPE during these 12 months and this amounts to $292m tonnes of revenue.
  • During the same period, the US shipped 254,013 tonnes of LLDPE to China. Ninety three percent of US grades of LLDPE are affected by the Chinese tariffs. So, times these tonnes by 0.93 and the average CFR China price for the different LLDPE grades and this comes to $294m tonnes of revenue.

This gives you some ballpark numbers about the revenues immediately at stake for US PE producers over the next year if the tariffs stay in place for that long. Tariffs at 25% could make it economically unviable for Chinese buyers to acquire US HDPE and LLDPE cargoes.

But of course the scale of lost earnings will be much greater for US energy exports. Take LNG as an example. In this ICIS article, we wrote:

The US exported 1.8m tonnes of LNG to China from January until July 2018. This was up 19% from all of the 2017 exports from the US to China.  

Losing access to most of the developing world

This, though, could be just the tip of the iceberg for the potential loss of US earning, investments and jobs.

The trade war may have already done enough to convince China that the US is no longer a reliable trading partner.

China could as a result devote much more economic and geopolitical energy to making its Belt and Road Initiative (BRI) work. The BRI may become the world’s biggest free trade zone and so largely energy and petrochemicals self-sufficient.

US energy and petrochemicals companies might as a result lose access to both the China energy and petrochemicals markets and the markets of many of the other BRI member countries. Much of the rest of the developing world is in the BRI.

US companies may argue that this is far too alarmist (and, as, always, I very much hope I am proved to be wrong in raising these concerns). They could tell their shareholders that energy and petrochemicals volumes that cannot be exported to China will easily find a home elsewhere.

But the more I dig into the data and the more I subtract China’s extraordinary role in driving existing and future demand growth in markets as diverse as crude, LNG, PE and methanol, the more the numbers don’t seem to add up when you take China out of the equation. It is hard for me to see how US producers can prosper without easy access to China.

There is also the broader scenario, detailed above, of China creating this huge free trade zone that excludes the US. Other developing countries in the BRI include India, the whole of Southeast Asia, the whole of the Middle East, much of central Asia, parts of Africa and parts of Europe. Take all of these countries out of the equation and there appears to be quite simply no way that new US capacity being added in LNG, PE and methanol etc. can find a home.

This worst-case scenario may not happen, of course. The US-China trade war could fizzle out. But the longer it drags on, the more it seems likely to me that this worst-case scenario could come true.

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