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China holds all the petchems demand aces as it digs in for longer trade war

Business, China, Company Strategy, Economics, Fibre Intermediates, Middle East, Oil & Gas, Olefins, Philippines, Polyolefins, US
By John Richardson on 08-May-2019

By John Richardson

THE STRENGTH of China’s position in the intensifying trade war is further underlined by the above chart. In everything from oil and gas through to petrochemicals and finished goods, China is the world’s biggest market. Minus off China from consumption and many other developing countries, and even entire regions, can sometimes almost diminish into statistical rounding errors.

Take the ethylene glycols (EG) data behind the above chart. Between 2019 and 2025, we estimate that China will account for no less than 84% of the total global net imports amongst the world’s countries and regions in net import positions. Europe is in a very distant second place at just 9% with the Asia & Pacific region at 5% and South and Central America at 2%.

The chart takes this data and measures it against the big rise in US net exports in 2019-2025. The US  is building a major wave of new glycols plants that are based on very cheap ethane gas to make the ethylene to then make the EG. These complexes are part of wider steam crackers that include much bigger new capacities of polyethylene (PE).

The left hand bar on the chart assumes that the US will retain access to the China EG market. Divide US net exports with global net imports including China and the US would need just a 10% market share. The right hand bar assumes that the US cannot export any EG to China in 2019-2025. Based on US production remaining unchanged, the US would need a 57% share of the market minus China.

The problem for the US glycols business is not just the 25% tariffs that China imposed on US cargoes from last August onwards as part of the trade war.

I had assumed, along with many other people, that the trade war was heading for a resolution during the next few months – and that the deal would include China buying more US energy, agricultural and petrochemicals products. China has the power to order its state-owned and private companies to buy more US products.

The situation has now, though, flipped because of President Trump’s 5 May tweets and US unhappiness about what it claims is China reneging on trade agreements. Tariffs on Chinese exports to China are set to increase from this Friday. This may well produce a reciprocal response from China. What if China responds by ordering its companies to buy less US goods because it again has the authority to do so?

In the case of EG, it has the ability to stop buying US material altogether as there are plenty of other imports available elsewhere. Our data again show that in 2019-2025, the US will account for just 10% of global net exports across all the net export countries and regions. The Middle East will comprise 69%, meaning that China can easily buy more EG from the Middle East in order to entirely exclude the US.

It may not come to this. But, as I said at the beginning, the EG story further underlines the strength of the Chinese position in the trade war.

China: “No more concessions”

China’s politicians have long known that they are in a strong position because of the gargantuan role China plays in demand for everything. Their feeling of dominance increased during last month’s Belt and Road Initiative conference, according to the Wall Street Journal. The journal writes:

The conference gave a boost to those in the government and ruling Communist Party who contend that Beijing was conceding too much to the US, given how much global growth depends on China.

The conference obviously took place before President Trump’s 5 May tweets and subsequent comments from his trade team about China going back on agreements. Now it appears, according to the South China Morning Post, that Beijing is even less willing to concede any ground. The newspaper argues there will be no more concessions from China because:

  1. Economic stimulus in Q1 has placed China in a better position to withstand a projected trade war.
  2. If China agreed to the US proposal for a trade deal enforcement mechanism and for changes to China’s economic growth model, including reducing state subsidies, this would amount to a national humiliation. This cannot happen during a sensitive year of Chinese political anniversaries.

Let’s hope that a trade deal can be done. But if this doesn’t happen, prepare for the possibility of a major redrawing of petrochemicals trade at the expense of the US.