China PE markets weaken on yuan slump amid US-China trade tensions

Author: Angie Li

2019/08/28

SINGAPORE (ICIS)--China’s domestic polyethylene (PE) prices started to show bearishness amid the slumping yuan and increased appetite for hedging as the US-China trade war escalated.

The Chinese yuan hit a record low versus the US dollar on 26 August 2019. (Photo by Kin Cheung/AP/Shutterstock)

On 27 August, linear low density PE (LLDPE) were at yuan (CNY) 7,200-7,350/tonne, down by CNY125/tonne from the assessment on 23 August, according to ICIS data.

Current import offers for the same grade are at $810-840/tonne CFR (cost & freight) China, lower by $27.50/tonne from the previous week’s assessed prices.

ICIS Editorial Chart goes here

China unveiled on 23 August an additional 10% duty on US-origin low density polyethylene (LDPE) slated to take effect on 15 December; and another 5% tariff on both high density polyethylene (HDPE) and LLDPE from the US from 1 September.

This, coupled with current tariffs levied from 23 August 2018, pushed up the duties for LDPE, HDPE and LLDPE to 16.5%, 36.5% and 36.5%, respectively.

China tariffs on US-origin PE

HS code Current tariff on US-origin cargoes Future tariffs on US-origin cargoes January-July 2019 PE import volume from the US

(in tonnes)

Year-on-year change
LDPE (39011000) 6.5% 16.5% from 15 December 200,726.394 145%
HDPE (39012000) 31.5% 36.5% from 1 September 49,216.105 -79%
LLDPE (39014020) 31.5% 36.5% from 1 September 66,565.424 -56%

Source: China Ministry of Finance

China’s retaliatory tariffs were largely expected after US President Donald Trump threatened early in the month to levy 10% import duties on an additional $300bn of imports from China starting 1 September, a trader from east China said.

“We, accordingly, are adopting a cautious stance when purchasing US-origin cargoes,” the trader said, but added that the resulting sharp depreciation of the Chinese currency is the bigger concern for the market.

The Chinese yuan fell to a record low in the offshore market on 26 August to CNY7.18 against the US dollar, down 0.7% from 23 August. It was the lowest level recorded since the currency began trading in the international market in 2010.

The yuan’s slump has significantly undermined sentiment in the PE import market, prompting most buyers to make counteroffers at below $900/tonne CFR China.

Most market participants expect the US-China trade war will be protracted, and the currency will keep on depreciating, as Trump threatened on 24 August to slap additional duties on $550bn worth of Chinese goods from 1 October.

Sharp declines in the yuan-US dollar exchange rate in May and August were directly linked to the US’ imposition of fresh tariffs on Chinese goods.

For Chinese PE importers, the two rounds of additional tariffs and the consequent fall in the yuan value pushed import costs up by more than $50/tonne or nearly CNY400/tonne.

Source: ICIS

For several PE grades, import prices turned higher than domestic spot levels, heightening capital pressure among traders.

"The market is addled at present, and default risk is getting higher. Thus, traders and converters will reduce feedstock purchases and adopt a wait-and-see stance,” said another trader in east China.

There are also concerns that US-origin cargoes would continue flowing into the Chinese market despite the additional tariffs.

In the first seven months of the year, China's imports of US LDPE more than doubled year on year, while its intake of combined US HDPE and LLDPE declined by 70.3% year on year to around 116,000 tonnes, China Customs data showed.

"The additional tariff on US LDPE will take effect on 15 December. Despite a wait-and-see stance, we have already received a great number of offers for US-origin cargoes which were re-exported from bonded warehouses in Singapore and Malaysia," said an east China-based importer.

"These cargoes could arrive in China before the effective date according to current shipping schedules,” the importer said.

Some traders said risk remains high even though the cargoes could arrive before 15 December, as trade policies of both the US and China could change at any time.

Focus article by Angie Li

($1 = CNY7.16)

Click here to view related stories and content on the US-China trade war topic page.