China’s tariffs against US imports threaten to hit the US economy where it could hurt it most – in areas where the US cannot afford to lose access to the China market.
This applies to agricultural products such as soybeans and many of the petrochemicals and polymers in which the US is undergoing major capacity expansions. The most extreme example in the petrochemicals sector is ethylene glycols (EG). On 8 August, China announced it would impose 25% import tariffs on a wide range of US petrochemicals and polymer imports, including EG. The tariffs came into effect on 23 August.
There are three types of EG – mono-ethylene glycol (MEG), di-ethylene glycol and tri-ethylene glycol. By far the biggest share of EG production is in MEG.
MEG makes polyester fibres for clothing and non-clothing polyester end-use applications. It is also used to produce polyethylene terephthalate chips and films that make plastic bottles and packaging film. If the tariff on EG stays in place, US producers may decide to absorb the cost of the 25% tariff themselves. This would of course damage their profitability.
Or they could try to pass on the cost of the tariff to Chinese customers at the risk of losing sales to China, as Chinese buyers may switch to cheaper alternative suppliers.
“You cannot get away from it. China will be by far the most important importer in 2018-2025. Its import demand will continue to dominate the global EG business,” said Moritz Lank, senior analyst with ICIS Analytics and Consulting. His data crunching, for the ICIS Supply & Demand Database, reveals that between those years, northeast Asia will account for no less than 80% of global net imports (imports minus exports) of EG. Net imports in 2018-2025 will total 86m tonnes.
China is part of northeast Asia and accounts for all this region’s net imports, as South Korea, Taiwan and Japan are net exporters. This reflects China’s huge role in polyester clothing and non-clothing manufacturing and its inability to build sufficient EG capacity to meet its demand.
“Although China has added a lot of ethylene capacity over the last 20 years through building crackers, most of that ethylene has gone into making other ethylene derivatives rather than EG. We expect this trend to continue,” said Lank.
China’s coal-to-olefins (CTO) investments are also slowing down because of pollution and cost-competitive issues. There is also another route to produce EG from coal. This involves, as with the CTO route, making syngas from coal and then converting the syngas into methanol.
Methanol is then converted into dimethyl oxalate and then EG. These investments are being held back by the poor quality of the EG being produced.
Meanwhile, the US is undergoing a major expansion in its EG capacity because of the low-cost availability of ethane, resulting in very cost-competitive ethylene and EG production. The Supply & Demand Database, which contains forecasts through to 2040, shows that:
- Between 2008 and 2017, the US was a net importer of EG. During those years, US net imports totalled 4m tonnes. This was before the shale gas revolution when the cost of ethane to make ethylene was very high.
- In 2018-2025 the US will swing into a net export position (exports minus imports) because of new EG plants. Net exports will total 8.3m tonnes.
ICIS data also show that if the US tried to pass on the 25% tariff and was, as a result, unable to export at all to China, this 8.3m tonnes of net exports would have to find a home in a remaining net export market totalling 17m tonnes. The US would have to take a 49% share of this remaining export market from a very low percentage share today. This would be very difficult because of competition from other suppliers.
CANCEL EG PROJECTS?
“In the worst-case scenario, would US EG investments be cancelled? Several of them would not because they are already under construction. They are also part of wider investments to make not just EG but also polyethylene,” said Lank. “This makes it impossible to cancel the EG part of these projects without causing unsustainable economic imbalances.”
China might, though, also need US supply to meet its huge import needs, Lank argues.
“China has to buy the EG from somewhere and other suppliers may not be able to close the gap created by a lack of US imports,” he said.
The US decision to pull out of the Iran nuclear deal and impose tough new sanctions on Iran has, for example, raised questions about Iran’s ability to raise its EG capacity.
“There are only three EG technology suppliers, two of which are western companies – and one of the two doesn’t licence its technology at all. This makes Iran’s options under the new sanctions regime very limited,” Lank added.
ICIS assumes that Iranian EG capacity will rise from 1.4m tonnes/year in 2018 to 1.9m tonnes/year in 2025. But Lank warns that this may not happen because of sanctions.
Complicating the picture is Saudi Arabia which is another major EG producer. Earlier this year, Jubail United Petrochemical CO (JUPC) announced plans for a new 700,000 tonne/year EG plant in Saudi Arabia that is due to start up in 2021. JUPC is a joint venture 75% owned by SABIC.
“I wouldn’t be surprised if another EG project is announced in Saudi Arabia,” said Lank.