China petchems rattled by fresh US tariffs hike, possible new Iran sanctions

SINGAPORE (ICIS)–US President Donald Trump’s unexpected move to increase the tariffs on some $200bn worth of Chinese imports will likely further rattle  domestic petrochemical markets in the near term.

Chemical industry players are also grappling with fresh concerns about possible additional sanctions on Iran in the coming week.

Trump on 5 May said that the US will increase the tariffs on Chinese imports to 25% from 10% currently, and threatened to target a further $325bn in trade.

Asian equity markets faltered on Monday as investors dived for safety, with Hong Kong’s Hang Seng Index closing 2.90% lower.

Sinopec Shanghai Petrochemical fell by 1.70% while PetroChina was 2.05% lower.

Taiwan’s Stock Exchange Weighted Index closed down 1.80%, with Formosa Petrochemical Corp down 2.16% and Nan Ya Plastics Corp 1.02% lower.

In southeast Asia, Singapore’s Straits Times Index closed around 3% lower. Malaysia’s PETRONAS Chemicals Group fell by 2.12%.

Japan’s financial markets are closed from 27 April to 6 May for the Golden Week holiday but contracts on Japan’s Nikkei 225 sank as much as 2.5% in Chicago following Trump’s tweets.

South Korea’s markets are closed on Monday for a holiday, while Thai markets are closed for the coronation of King Maha Vajiralongkorn Bodindradebayavarangkun which runs from 4 May to 6 May.

In international crude markets, ICE Brent crude for July was down $1.36/bbl at $69.49/bbl while NYMEX WTI for June fell by $1.31/bbl to $60.63/bbl.

“The prospect of months of trade talks being derailed by Trump has raised concerns over future demand for oil,” said Jasper Lawler, head of research at London Capital Group.

“Oil was already under pressure from signs that US supply was on the up. Add into the equation concerns over demand and the risks to the downside for oil have completely flipped from just two-three weeks ago,” Lawler said.

In China, domestic polypropylene (PP) futures slipped 0.33% while purified terephthalic acid (PTA) futures were down by 1.89%. Monoethylene glycol futures dropped 1.45%.

Trump’s announcement further added to the bearishness surrounding China’s macroeconomic environment and chemical futures markets, but operations in the domestic commodities business remain unfazed for the time being.

“Most market players are more focused on the Iran sanctions,” said Rachel Qian, an analyst with ICIS Petchem Analytics.

“The US government is considering further aggressive enforcement of its economic sanctions on Iran – targeting more companies and financial institutions that do business with the Islamic Republic in an attempt to cut off lucrative sources of US dollar-denominated hard currency,” Qian said.

These new sanctions could have a wider impact on the petrochemical markets in China due to its trade links, with the PP, polyethylene (PE), styrene monomer (SM) and methanol to see the largest impact as Iran is a major supplier of these petrochemicals globally, she added.

According to official customs data, Iranian cargoes account for 30% of China’s methanol imports in 2018.

Most petrochemical market players have adopted a wait-and-see attitude as they await the outcome of the trade negotiations between the US and China.

“China has already cancelled Vice Premier Lui He’s trip to Washington for trade talks this week… Suddenly the risk of a full-blown trade war has increased sharply, and the markets are reflecting this.

“Headlines from the trade talks had been indicating that progress was being made and that the two sides were closing in on an agreement. If there is one thing the markets dislike, it is the unexpected and Trump’s tweet caught the markets completely off-guard sending investors into a risk off frenzy,” London Capital Group’s Lawler said.

However, China’s polyolefins markets could still be supported by basic rigid demand as industry players expect the Chinese government to introduce further stimulus policies to safeguard its GDP growth target of 6.0-6.5% in 2019, said Joey Zhou, a senior analyst at ICIS.

“Supporting policies may also include some deregulation on environmental protection, which has been strengthened recently as a result of the recent explosion at Yancheng, Jiangsu province,” she added.

Focus article and interactive by Nurluqman Suratman

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