Trade war fears return as US LLDPE becomes more exposed to China

Business, China, Company Strategy, Economics, Europe, European economy, Fibre Intermediates, Olefins, Polyolefins, Styrenics, US

By John Richardson

THE ground has shifted under our feet once again. Just as it seemed as if the US and China would complete a trade deal by the 2 March deadline, the prospects of an agreement have suddenly diminished.

This is the result of the Trump administration declining an offer from two Chinese vice-ministers to fly to Washington for preparatory talks. The talks were meant to pave the way for higher-level discussions at the end of January.

A problem is US insistence that any deal includes China stopping what the US claims is forced technology transfers by foreign venture partners to their Chinese partners. The US also wants China to abandon state subsidies for manufacturing.

Good luck with that. If China were to concede on this latter point it would run a major risk of economic stagnation. This makes such a concession quite simply impossible.

China has to maintain heavy funding of higher value industries such as electric vehicles, artificial intelligence and robotics if it is to stand any chance of escaping its middle-income trap.

The disastrous One Child Policy has pushed China into a middle-income trap some ten years too soon. China is at risk of becoming old before it is rich.

The mood music may of course change again as we live in very uncertain political teams. But if a deal is reached by the March deadline, it would only be paper thin as there is insufficient time to properly address the US and China’s major economic and geopolitical differences.

This would make any deal likely to fall apart, leading to a resumption of the trade war/Cold War. A key risk is how a deal would go down with President Trump’s core supporters.

Yesterday’s events also serve as a sober reminder of what is at stake for the US petrochemicals industry. US PE, ethylene glycols and styrene are subject to 25% Chinese import duties because of the trade war, with US styrene facing the added burden of Chinese antidumping duties.

China, as I shall detail below, is by far the biggest import market for all of these products. Assuming that the US cannot export to China because of the tariffs, the US petrochemicals industry would be in deep trouble.

US LLDPE exposure to China has just got worse

Of the three major grades of PE, US LLDPE is the most exposed because of a.) The scale of US capacity increases and b.) The size of China’s projected deficits in 2019 and beyond.

Last year was a great year for Chinese LLDPE for reasons I shall detail in a later post. This resulted in net imports totalling what I estimate will be 4.6m tonnes – 44% higher than in 2017!

This year is probably going to see negative or flat import growth on increased local production and a weaker Chinese economy.

But even if we assume that net imports decline to say 4.2m tonnes – 10% lower than in 2018, this would still mean:

  • The US would need a 26% share of the total global net import market if it can access China.
  • A 51% share of the remaining global net import market if it cannot ship any cargoes at all to China.

These numbers take into account my guesstimate of import growth in other markets which I see as being weak in 2019.

I had earlier estimated that the US would need a 16% share of the total global net import market if it could ship to China in 2019 and a 36% share if it could not. These numbers were based on lower predictions for US net exports and Chinese net imports.

It looks equally grim in in ethylene glycols (EG). The US would need just a 9% share of the global net import market in 2018-2025 if it can move product to China. Excluding China and this increases to a completely unfeasible 53%.

Unlike in PE and EG, the US is not adding any styrene capacity. This the result of very weak global growth in the biggest styrene derivative, PS. US styrene exports have become more important to the US industry because of weakness in local downstream PS.

China will again remain by far the world’s largest styrene importer. The US would need a 37% share of the world’s net import market in 2018-2025 if it can export to China. This rises to 61% if China is unavailable.

The de-globalisation of petrochemicals

The US/China trade war is just one symptom of the rise of populist politics on growing public unrest over diminishing economic opportunities. Globalisation is going into reverse.

This should be a major topic of debate for the rich and famous who are taking part in this year’s World Economic Forum in Davos, some of whom might be amongst the 26 richest people in the world.

The wealth of these 26 people last year reached a combined $1.4 trillion, according to Oxfam. This was the same amount as the total wealth of the 3.8 billion poorest people in the world, who account for 50% of the global population.

PREVIOUS POST

Polyethylene production via oil and gas: The next horse and cart

21/01/2019

By John Richardson IF YOU had conducted a snap survey of horse and cart manufact...

Learn more
NEXT POST

The polyethylene world is now even more hooked on China

25/01/2019

By John Richardson CHINA’S NET PE imports look likely to have risen by an aver...

Learn more
More posts
Polyethylene producers must avoid repeating the mistakes of Q1
05/06/2020

By John Richardson AFTER a very challenging first quarter, nobody wants to make further write-downs ...

Read
China’s PP production growth could lead to big declines in 2020 imports
01/06/2020

By John Richardson PLEASE DON’T say I didn’t warn you. China is rapidly moving towards polypropy...

Read
Coronavirus, impact on the developing world and the scale of demand losses
29/05/2020

By John Richardson ALL OF us are struggling to come to terms with a collapse in the global economy t...

Read
Coronavirus, reshoring and the polyester industry: Good luck with that
27/05/2020

By John Richardson POLITICIANS, not just including the Populist variety, are talking a lot about res...

Read
Beware of the fragile nature of the oil and petrochemical price recovery
22/05/2020

By John Richardson RECENT rises in oil and petrochemicals prices should not in my view be taken as a...

Read
China petrochemical inventories build on what could be false hopes of a V-shaped rebound
19/05/2020

By John Richardson AS PETROCHEMICALS storage space in China fills up on the hope that the country ca...

Read
Further polyethylene rate cuts seem inevitable with no certainty on who will blink first
18/05/2020

By John Richardson IT IS NOT just a razor-like focus on petrochemicals demand that will get you thro...

Read
What petrochemical companies must do to adapt to a smaller coronavirus economy
15/05/2020

By John Richardson PETROCHEMICAL companies can adapt to the coronavirus New Normal by running their ...

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