US EDC caught in China tariffs; players expect minor disruptions, firmer prices

HOUSTON (ICIS)–The US will begin implementing tariffs on Thursday against a host of Chinese products. This will draw US ethylene dichloride (EDC) into the fray as China implements retaliatory 25% tariffs against US imports of the feedstock for polyvinyl chloride (PVC).

Participants said that market impact will likely be minimal – or at least, not significant.

“It’s not ‘no problem’, but it’s not much of a problem,” said a US producer that is active in global EDC markets.

The issue has been a closely watched, evaluated and played out in recent weeks because China is the largest consumer of US EDC exports. China takes about 28% of the 1.35m tonnes exported by US producers in 2017, according to data from the US International Trade Commission (ITC).

That is partly because US EDC retains a cost advantage, not only for less-expensive ethylene from shale gas-derived ethane, but also for low-energy costs, also via cheap natural gas. That will give US producers more options going forward – the ability to sell into more markets.

Trade participants became nervous as US and China rearranged their respective proposed tariff lists.

China dropped PVC from the list earlier this month but retained EDC for retaliation.

With the approach of the implementation date, sentiment has emerged on a string of probabilities:

– China has been buying less EDC out of the US Gulf because of greater production in its own region. Chinese buyers bought 495,060 tonnes of US EDC in 2016, but that lowered to 371,844 tonnes in 2017.

– Sales this year are even lower, down to 145,280 tonnes through the first six months of the year.

– The US has other options and would prefer to sell to Europe and South America, where prices do not have to be suppressed to make sales. The closure of mercury cell chlor-alkali production in Europe has created demand for perhaps 100,000-150,000 tonnes/year of US EDC.

– Some US EDC is produced by “swing producers” who make extra EDC when it is profitable or to support higher caustic soda production. EDC is the best way to sell and export excess chlorine production.

– Buyers in China are likely to pay higher prices as they seek supply from Southeast Asia and the Middle East, where prices are likely to move up to match the level of US price-plus-tariffs. Price increases from Northeast Asia are likely in the coming weeks, according to one market estimate.

– US producers will focus on gaining sales in Southeast Asia, India, Egypt, Brazil and markets in the Mediterranean.

– China will increase buying from the Middle East and Southeast Asia.

– Structural prices for US EDC are likely to firm globally. US EDC was trading at about $100/tonne on 1 January. It is now above $300/tonne and is likely to firm further, according to one market assessment. After the March tariff announcements, prices pushed higher.

The US tariffs are part of import taxes imposed against $50bn in Chinese goods imported to the US annually and implemented in two phases.

It is focused on goods China has included in its “Made in China 2015” initiative, which has led to processes that appropriates the trade and technology secrets of US companies trying to conduct business in China, according to the US Trade Representative.

Another round of tariffs against an additional $200bn in China imports to the US is slated for implementation by Washington in the coming weeks.

That move is getting intense opposition from US industrial groups, including the American Chemistry Council (ACC).

“We can’t just keep throwing tariffs in every direction against our long-time trading partners,” one trader said of the cumulative impact of US attacks against NAFTA partners and Europe, apart from the China tiff. “All of this is going to slow down trade and slow down economies.”

Major US EDC producers include Olin, Occidental Chemical, Westlake Chemical and Formosa Plastics.

Focus article by Bill Bowen

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