Trade war means seismic shifts for chemicals

As US President Donald Trump ratchets up his tariffs against China, it looks increasingly like a full-blown trade war is in the offing.

His decision to put “America First” signals a move away from the globalisation philosophy that has dominated the global economy since the Second World War. Replacing it is a retreat into a focus on individual nations and regions which has major implications for the chemical industry.

With import tariffs going up between major economies and likely to increase in scope and intensity, chemical CEOs will need to focus on ensuring they have production within their key markets. Relying on a single plant to serve the global market may no longer make business sense if a 25% tariff will be slapped onto its exports.

FROM FEEDSTOCKS TO MARKET ACCESS

Close proximity to cheap feedstocks has been a key driver in plant location decisions for many years. Now unfettered market access may become more of a factor in decision-making.

Indeed this change is happening already. Look at BASF’s decision this week to choose China for its largest-ever investment – a $10bn verbund site in Guangdong province. The company had been expected to choose the US for its largest investment – a methanol-to-propylene plant based on propane from shale gas. By prioritising China (without advantaged feedstocks), BASF shows how its strategy has shifted.

Local production in China has also become a priority for US electric carmaker Tesla, which this week also chose China over the US as the location for a world-scale factory. China is a huge market for electric vehicles which Tesla will now be able to access on equal terms to local competitors. The latest round of tariffs had forced the company to raise the price of its US-made exports to China by $20,000 per vehicle.

CHINA JVS SWITCH TO WHOLLY-OWNED

China is seizing the opportunity the trade war has brought by implementing rules which allow large investments like these to be 100% foreign-owned. BASF’s new verbund complex will be owned and operated by BASF and Tesla’s new plant will also be independent. Previously local joint venture partners were required, such as the BASF-YPC JV with Sinopec at its Nanjing verbund site.

Opinions vary widely about the impact of the trade war on US shale-based start-ups, some of which are 100% export-oriented. The impending Chinese tariffs against the US include low density polyethylene (LDPE) and linear LDPE (LLDPE).

Houston-based ICIS senior consultant James Ray points out that US ethane-sourced PE producers are so cost-advantaged they could absorb the 25% tariff on their products exported to China and still be profitable. He says the tariffs will impede additional US PE capacity additions, but only temporarily. The ICIS Supply and Demand Database forecasts that as the new capacities come on line, US LDPE exports will increase from 35% of production in 2017 to reach 56% in 2020. For LLDPE the figure goes from 45.5% in 2017 to 65% in 2020.

According to Ray, with US LDPE and LLDPE exports accounting for only 12% and 17% of global exports respectively, “it would seem they could easily find another home for this production.” Exports to China only accounted for 6.9% of US LDPE production in 2017 while the figure for LLDPE was just 0.4%.

Ray believes the current tariff moves by Trump are simply an attempt to redress the current trade imbalance between the US and China. The US has run a trade deficit with China at least since 1985 with the figure rising to over $300bn/year since 2012.

ICIS consultant John Richardson points out that China’s proposed $50bn of tariffs against the US includes a 25% duty on US exports of ethane. At stake could be the viability of 11 Chinese cracker projects that would rely on imports of US ethane. He believes China may invest more in Iran to access alternative feedstocks.

GLOBAL PE PRICE WAR

International eChem chairman Paul Hodges believes the tariffs could lead to a global PE price war, as the wave of new US production will be sent to new markets, most likely Europe.

“This won’t just be a US problem, because they will still want to move their product – it has got to come to Europe, as there is no surplus demand in Asia, the Middle East or Latin America.” The consultant added that this first wave of tariffs were a wake-up call to those who thought globalisation was going to continue as it did in the past. “We have reached a tipping point where we have to expect that trade wars are more rather than less likely,” Hodges said.