Prepare for the worst in US-China trade relations in 2018

17 January 2018 17:36 Source:ICIS Chemical Business

We got away with it in 2017 by luck rather than design, as there is of course very little that petrochemicals and polymers companies can do to prevent a global trade war other than lobbying politicians.

Part of the reason for the lucky escape was the warmth of the Trump-Xi meeting in the US in April. And throughout the year, the White House calculation seemed to be that the US needed China as part of efforts to get North Korea to abandon, or probably more realistically pause, its nuclear weapons programme. Trade issues seemed to, as a result, take a back seat.

There was also the US president’s high profile visit to Beijing in November, the very generous reception by his Chinese hosts, and the signing of $250bn of US-China trade deals. The strong Trump-Xi personal connection during the visit and the trade deals were seen by Chinese business and government officials as having stabilised the US-China trade relationship.

US China trade

But in comments that have turned out to be very prescient, Scott Kennedy, deputy director of the Freeman Chair in China Studies, told the South China Morning Post in an article published immediately after the Beijing visit: “We are on the cusp of a new American strategy which replaces dialogue and multilateralism with extended unilateral pressure.”

Just a few weeks later his fears seem to have been confirmed with the publication of the latest US National Security Strategy which characterises China as an economic and geopolitical adversary. The document, which for the first time linked national security with economic issues, was viewed as a victory for trade protectionists in the White House.

Roll forward to 2 January and China’s Alibaba saw its $1.2bn bid to buy MoneyGram, a US money transfer company, blocked by a US government committee because of national security concerns. This follows the same committee blocking a $1.3bn attempt by China-backed private equity firm Canyon Bridge Capital Partners to buy US memory-chip maker Lattice Semiconductor back in September 2017.

Beijing was angry enough about the National Security Strategy. But the rhetoric was stepped up on the blocking of the MoneyGram deal when the Chinese government, via state-owned media outlet Xinhua, warned: “China and the United States have met a bumpy start to 2018 as scepticism about Chinese investment and trade are clouding over Washington. The bonhomie that grew between China and the United States in Beijing in November, when the two signed hundreds of billions of dollars of deals, seems to be fading away as the US side is stuck in a zero-sum mentality.”

Xinhua added that during the last 30 days of 2017, the US had launched an investigation into Chinese intellectual property and technology transfer, had self-initiated probes into Chinese-made aluminium products, and had rejected China’s market economy status at the World Trade Organization.

SCENARIOS FOR 2018

The global economic recovery is very fragile and could easily break down in 2018. This fragility is the result of the coordinated withdrawal of Western central bank stimulus and anything between a moderate and severe slowdown in the Chinese economy.

Inflation pressures, from higher oil prices and China’s campaign to clean up its environment that has driven-up the cost of China’s manufacturing exports, are another threat.

For the reasons given above, we must also factor in the risk of a deterioration in the US-China trading relationship. This could take the form of anything from more hot rhetoric, but not further actions, to a full-scale trade war.

The chart on linear low density polyethylene (LLDPE) deficit regions is a reminder of the biggest direct implication of a major US-China trade dispute for the petrochemicals industry in 2018. Large additional volumes of polyethylene (PE) are scheduled to be exported as production at new US complexes is ramped-up.

LLDPE deficit

The 2018 data for one grade of PE – LLDPE (and the same applies to the other grades) – show that if major disruptions to the global PE market are going to be avoided, China has to take a lot more US material. As you can see, China will have the largest deficits among all the regions and countries in deficit.

Could there be new trade restrictions or even an outright ban by China on US PE imports? Possibly, yes, given that the latest trade data indicate that China was only dependent on the US for 5% of its imports in 2017. This is despite imports surging to 10.9m tonnes in January-November 2017 from 9m tonnes during the same 11 months last year.

The reason for the low US market share was most extra shipments were supplied by China’s fellow One Belt, One Road (OBOR) members.

Even if PE imports expand at the same rate as they did in 2017, China might be able to source all of its requirements from countries other than the US. Five percent isn’t a big gap to close. But a strong scenario is that imports will not grow in 2018 at the same rate as they did last year, as some of the increase was stock building. This would make it easier for China to restrict, or even entirely block, US exports.

Assuming this scenario, here are two outcomes for global PE markets:

■ The US delays the start-up of some new capacity until US-China trade relations improve.

■ The plants come on-stream on schedule and the new US output leads to a sharp fall in global pricing as the highly competitive ethane-based US producers try to place their volumes in markets other than China.

Or of course the “War of Words” remains only that. Perhaps, for example, the new National Security Strategy will sit in a White House drawer somewhere, unused.

But you cannot afford to only plan for this best of outcomes, given the nature of today’s relationship between the US and China.

John Richardson is an ICIS senior consultant specialising in China polyolefins and author of the ICIS Asian Chemical Connections Blog. More in-depth analysis can be found in the ICIS PE Asia and PP Asia price forecast reports. Contact john.richardson@icis.com

By John Richardson