US PE Exports: Impact Of China Tariffs On Smaller Markets

Business, China, Company Strategy, Economics, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins

By John Richardson

LET US assume for downside planning purposes that the Chinese 25% tariffs against all US high-density polyethylene (HDPE) exports and 93% of US linear-low density (LLDPE) imports remain in place for the rest of this year and into 2019, once they come into force on 23 August.

This might not happen, of course. The good news is that a Chinese trade delegation is due in Washington at the end of August. China might win a deal from the US because of the quite brilliantly targeted Chinese tariffs against not only US PE imports, but also methanol, oil, liquefied petroleum gas and soybeans.

But is the US in the mood to compromise? And the fact that the Chinese officials making the trip to Washington are not very senior may suggest that China is not that confident of a deal. Hoping for the best whilst not planning for the worst isn’t a strategy. That was the approach of those who thought that there was no way that China would introduce PE tariffs against US imports in the first instance.

One Scenario: Tariffs stay in place and US sales to China to come an almost complete halt

We estimate that China will account for 51% of global net HDPE and LLDPE net imports (imports minus exports) across the major deficit regions and countries in 2018-2025. This means that over the shorter term – this year and 2019 – China will have a similarly dominant role as the world’s biggest importer. It also means that it is mathematically impossible for the US to be able to comfortably place its big increases in production without exporting to China.

Whilst the US might have the variable cost margins big enough to on paper absorb the 25% tariffs, they are carrying major fixed costs from new capacities. Further, US companies have to deliver on their promises to shareholders – and they have promised very strong profits based on no tariffs.

So, US companies may attempt to get Chinese buyers to absorb most, if not all, of the 25% tariffs. The buyers, which have plenty of other options as US imports play on a small role in Chinese total imports, could well refuse.

And if the Chinese yuan remains as weak as it is today against the US dollar and if the Chinese economic slowdown continues, this will make Chinese purchases of US PE that carry additional duties even less likely.

There is also the risk of new non-tariff barriers as Chinese customs officials delay US cargoes for extra inspections. This is already happening in auto components and food, according to the South China Morning Post. US PE producers may not want to take the risk of PE cargoes being held up by customs for weeks because of price fluctuations.

Other smaller markets flooded

Five will not go into four, as I discussed last week. The other HDPE and LLDPE net imports regions are too small to easily absorb the new US production, and the US seems likely to stick to original production plans because of integration upstream into natural gas. US natural gas producers have to remove big volumes of ethane from methane before they can place methane into domestic pipelines. The only end-use market for ethane is steam cracking.

So, the other smaller deficit regions could end up being flooded by US HDPE and LLDPE at the detriment of producers in these regions.

Take a look at the chart at the beginning of this blog post, which covers the Asia & Pacific region as an example.Vietnam will have the biggest net imports in 2018 and 2019 at 2.8m tonnes, followed by Indonesia at 1.7m tonnes and India at 1.5m tonnes.

The HDPE and LLDPE net exporters in Asia & Pacific will be Singapore and Thailand in 2018-2019. India will remain, as I said, in an overall net import position, but recent new capacities mean it will raise its exports.

Whilst Singapore and Thailand will face tougher competition in Vietnam, Indonesia and other Asia & Pacific deficit countries, they can export more to China because of displaced US volumes. The same applies to India.

But in a weaker global economic economy, and because of the large volumes of PE that the US will have to place, downward pressure on the margins of Asia & Pacific producers could be substantial. Perhaps this will lead to the region’s producers calling for trade protection against the US.

PREVIOUS POST

Turkey Crisis: Implications For Polyolefins And Global Economy

14/08/2018

By John Richardson THE first ramification of the Turkey crisis is that the colla...

Learn more
NEXT POST

US Risks Losing Access To 82% Of Global PE Consumption Growth, 80% Of Exports

20/08/2018

By John Richardson PERHAPS this week’s low-level trade talks between the US an...

Learn more
More posts
Developing world polymers demand unlikely to see quick rebound
20/09/2020

By John Richardson THIS IS a tragedy in the genuine sense of the word, not just in the so-often misu...

Read
China’s policy dilemma: raising local demand while protecting exports
13/09/2020

  By John Richardson IN THIS Western-centric world, a huge amount of ink is split over the cons...

Read
China’s polyethylene demand good so far in 2020 but beware of risks ahead
10/09/2020

Note that all the comparisons in this post are on a year-on-year basis unless otherwise stated By Jo...

Read
Ah, I see: China’s booming demand mystery a little closer to being solved
08/09/2020

  Note that all the data comparisons below are on a year-on-year basis By John Richardson THE P...

Read
The China polyester mystery continues in a world turned upside down
07/09/2020

By John Richardson SOMETHING very strange is happening in China’s polyester industry which has eno...

Read
China will struggle to boost local retail sales during rest of 2020 with export outlook uncertain
04/09/2020

By John Richardson IF IT were easy, then there would be an oversupply of owners of large yachts in M...

Read
Pandemic and the developing world: No quick and easy solutions
01/09/2020

By John Richardson POVERTY alleviation in low-income developing countries could be set back a decade...

Read
The pandemic and petrochemicals demand: a whole new approach is required
30/08/2020

By John Richardson MONITORING demand has never been harder because of the pandemic. One of my collea...

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