By John Richardson
DON’T BUILD your mind up over this week’s US/China trade talk as major breakthroughs seem very unlikely.
One reason is that we have in effect entered the next presidential election season even though the primaries don’t begin until early next year. President Trump has nothing to gain and everything to lose on softening his China approach, given that the the US economy is on the surface doing fine despite the trade war.
Another barrier to significant progress is, as I expected, Congressional resistance to the President’s offer last month to relax restrictions on US companies selling software to the Chines telecoms giant, Huawei. China hawks “stand ready to denounce Mr. Trump for any effort toward Huawei that could be seen as appeasement”, according to the Wall Street Journal.
This limits the president’s ability to use Huawei concessions as a bargaining chip in the new trade discussions, which are due to begin tomorrow. And for China, Huawei is a major sticking point as the company’s continued success is such a vital component of China’s attempt to escape its middle-income trap.
A further issue is the continued US insistence that China abandon state subsidies for manufacturing, one of the principal reasons why companies such as Huawei have been successful. Politically, because this is election season, the US cannot back down on this demand. China cannot accede to this demand as it would have to scrap its economic growth model.
Further, China wants the US to scrap existing tariffs as an indication of a goodwill,and as a precondition of it buying more US agricultural goods. As they say, “Good luck with that” because this is election season in the US.
The best I believe we can hope for is that the trade war won’t get any worse through the US imposing more tariffs on China and China reciprocating.
Failure to achieve major breakthroughs during this week’s talks would result in the trade war remaining a major drag on the global economy. The extent of the damage caused by the US’s trade and other disputes with several countries was highlighted by the IMF last week, when it cut its forecast for 2019 global growth to 3.2% from 3.3%.
For the petrochemicals business, spreads continue to tell the story of a weakening global economy in the context of relatively cheap feedstock costs. No matter what product you look at the story is consistent. Spreads are a multi-year lows even where supply is supposed to be tight this year. This must mean something is wrong with demand across all the petrochemicals markets.
I’ve obviously chosen benzene in for today’s chart as it is a major building block for many petrochemicals value chains. Benzene spreads remain at their lowest level since 2001.
When the G20 trade truce was agreed last month, I had expected spreads to enjoy a broad-based rebound on improved sentiment. I was wrong. Spreads have instead edged up, have remained flat or have fallen. This tells us that the trade war and the slowdown in the Chinese economy, which is not just about the trade war – along with rising oil prices on US, UK and Iran tensions – prevented any recovery.
More broadly speaking, I worry that there is still too much complacency out there about the difficulties that lie ahead.