INSIGHT: Biden win to ease US-China trade tensions - a boon for petrochemicals

Author: Pearl Bantillo

2020/11/09

SINGAPORE (ICIS)--A changing of the guard in the US early next year could diffuse heightened trade tensions with China which have been disrupting petrochemical markets for two-and-a-half years.

Barring any untoward incident, Democrat Joe Biden will take over the helm of the world's biggest economy from Republican Donald Trump on 20 January 2021.

Heavily criticised over his administration’s handling of the pandemic, Trump failed to secure a second four-year term as US president.

“The new administration seems almost certain to wind back existing tariffs and is very unlikely to engage in any new broad-sweep tariffs,” ICIS senior consultant John Richardson said.

The tit-for-tat trade war between the US and China started in July 2018 and saw prohibitive tariffs imposed on billions of US dollars worth of goods.

A phase-one trade deal has been agreed upon at the start of 2020, but implementation hit a snag due to the coronavirus pandemic that plunged the global economy into a deep recession.

“But, as has always been the case under every administration, there’s a risk of tariffs against China - or any country - based on anti-dumping investigations into individual products,” Richardson said.

“As China switches from being a major importer of some petrochemicals to an exporter, the chances of anti-dumping cases have increased,” he added.

“The general tone in tariffs, though, will be vastly different. There is a far lower risk of a major trade war that disrupts petrochemicals trade flows,” Richardson said.

US LIKELY TO RE-JOIN INTERNATIONAL PACTS
Biden - who was the vice president during the eight-year term (20 January 2009-2017) of President Barack Obama - is generally expected to rescind Trump’s decision to withdraw from major international pacts, including the Paris Agreement on Climate Change.

“With the US set to re-join the Paris Accord, we could see the US and China working on joint initiatives to deal with climate change,” Richardson said.

“The new administration will also use a bilateral approach in dealing with China. Biden’s first challenge will be to repair relationships with the EU and other overseas friends. Then a common approach towards China will be sought.

The US under Biden is also expected to re-join the Trans-Pacific Trade Partnership (TPP), which was spearheaded by Obama; and the nuclear deal  between world powers and Iran.

The US is not entirely expected to completely soften its stance on China as some thorny issues remain.

“The Biden/[vice president-elect Kamala] Harris administration will continue to pressure China on intellectual property-rights issues, state subsidies for manufacturing and China’s military influence,” the ICIS consultant said.

“It is also likely to be more critical than the Trump/Pence administration over human-rights issues,” he added.

LUKEWARM WELCOME FROM ASIA PETROCHEMICAL MARKETS
Discussions in Asia’s key petrochemical markets were largely thin on Monday, offering little reaction to a major political development in the US given no expected immediate shift in policies that directly affect the industry.

Gains in crude and Asian equities markets were largely sentiment-driven and could be fairly temporary.

At midday, spot prices of petrochemical feedstock naphtha, along with those of benzene, toluene, ethylene and propylene were unchanged from the previous session, according to ICIS data.

Positive economic developments in China will continue to hold sway on regional trades, buoying hopes over prospects of downstream industries like textiles.

Players in the paraxylene (PX) market were optimistic that China will continue driving up demand, thus allowing plants to maintain high run rates, in line with strong polyester production.

PX is mostly used to produce purified terephthalic acid (PTA), which is channeled into the polyester, polyethylene terephthalate (PET), textile and clothing industries.

China’s polyester facilities were running at an average high rate of 85.8% in the week ended 6 November, up from October’s average of 85.5%.

But sustainability of firm demand is in question, as the polyester sales-to-output ratio in the country had fallen below 100% from the second half of October. Supply could outpace demand.

Biden’s replacement of Trump “would not change the competitive relationship between the US and China”, ICIS head of Asia petchem analytics Amber Liu said.

“In the short-term, the tense relationship might be eased a little bit but I do not expect the import/export restriction would be fully removed,” she said.

“However, business is business, the output of the first-wave investments in the US need to be exported, like LLDPE [linear low density polyethylene], which will be continued,” Liu said.

US MAY CURB SHALE OUTPUT
Biden's victory over Trump could have repercussions on global crude supply going forward as US production may be curtailed.

“On the one hand, Biden may relax sanctions against Iran and Venezuela, therefore more crude supply will be released to the market,” ICIS principal crude analyst Li Li said.

Trump’s tighter sanctions on major oil producers Iran and Venezuela currently constrain their exports.

China Merchant Securities’ crude analyst Zhang Junfeng warned of oversupply with the expected softening of US stance against Iran, which would mean a downward pressure on oil prices.

Biden’s pivot toward developing new energies, however, “is expected to curb US shale production”, Li said.

HIGH VIRUS INFECTIONS DIM US ECONOMIC PROSPECTS
Biden is inheriting a “frail economy” from Trump and faces the pressing task of addressing the health crisis in the US as a first step to achieve a sustainable recovery, according to Oxford Economics chief US economist Gregory Daco.

But Trump has yet to concede defeat and is preparing legal cases to contest the election results.

“We stress that a non-peaceful transfer of power is a risk to monitor closely,” Daco said.

The US, which is the world’s biggest economy, is the worst hit by the coronavirus pandemic, with the number of infections now nearing 10m, about a fifth of the global cases, according to US-based Johns Hopkins University.

In contrast, China - where the outbreak originated late last year - is recovering well from a pandemic-induced economic slump, having emerged from a debilitating lockdown much earlier than other countries.

With the Republicans likely to retain control of the US Senate, Democrat Biden “will find enacting his major tax and spending proposals difficult”, Daco said.

”Increased policy certainty, trade multilateralism and a pro-immigration stance should generally benefit the economy, but they are unlikely to drastically modify its growth trajectory,” Daco said in research note on 7 November.

Oxford Economics revised down its 2021 GDP growth forecast for the US economy to 3.6% from 3.7% previously.

“Real-time data is quite sobering with demand being restrained by surging Covid-19 infections, rising over 100,000 per day, and slower employment gains proving insufficient to offset lapsing fiscal aid,” he said.

Insight by Pearl Bantillo

Additional reporting by Samuel Wong and Fanny Zhang

Visit the ICIS Coronavirus topic page for analysis of the impact on chemical markets and links to latest news.