Chemical CEOs optimistic on US-China trade outcome

17 May 2018 16:33 Source:ICIS Chemical Business

Many US chemical company CEOs are optimistic on a favourable outcome from US-China trade talks, as they watch developments closely and gauge the potential impact on their businesses.

Chemicals comprise about 40% of the list of 106 US products targeted by proposed China tariffs, including certain grades of polyethylene (PE), polycarbonate (PC), polyvinyl chloride (PVC), plastic products, acrylonitrile (ACN), catalysts, lubricants, epoxy resin, acrylic polymers, vinyl polymers, polyamides (nylon) and surfactants.

Concerns about a US-China trade war have been “overplayed” to some extent, the chief operating officer of DowDuPont’s Materials Science segment said on the company’s first-quarter earnings conference call.

“I don’t think we’re looking at a major trade war here – some of that’s been overplayed. We’re trying to find a path toward fair treatment with trade with all countries, including making sure IP is protected, and making sure products aren’t being dumped back here in the US,” said Jim Fitterling, who is also CEO-elect of Dow Chemical, the DowDuPont Materials Science company that will be spun off.

Fitterling

“I’m not gravely concerned about the tariffs right now. When we look at the hyperbole when these things are announced, people seemingly have a knee-jerk reaction,” said Peter Huntsman, president and CEO of Huntsman, at this year’s International Petrochemical Conference (IPC) hosted by the American Fuel & Petrochemical Manufacturers (AFPM) in late March.

Seeking to update trade agreements and policies should not be a cause for alarm, he said.

“We in this industry transact billions of dollars between companies, and are continuously looking at how to improve those contracts – on the supply chain, the pricing, formulations and everything else,” said Huntsman.

“But every time we talk about improving a trade agreement, some of which are decades old and desperately need to be updated, it seems like the world is coming to an end,” he added.

Huntsman

The CEO said he believes that ultimately the US and its trading partners will come up with better trade agreements.

Even in the event of tariffs and a trade war, DowDuPont executives believe the company is relatively insulated, with global production facilities and local production in China.

“Remember we have global assets to cater to the demand in China. The whole reason we built Sadara [in Saudi Arabia] was to serve the eastern part of the world… We built the US Gulf Coast [projects] to serve North America and South America,” said DowDuPont’s Fitterling.

SHIFT IN TRADE FLOWS, REBALANCE

DowDuPont CEO Ed Breen noted that in the agriculture business such as with soybeans, “with the global trade of those products, if product from America is not going to go to China, product from some other country is, and that American product is going to move around”.

So if Brazil ships more soybeans into China because of tariffs on US imports, the US would “pick up the slack because global demand is needed”, said Breen.

Breen

The same reasoning could be applied to any other globally traded product, such as polymers.

LyondellBasell CEO Bob Patel sees China tariffs on linear low density PE (LLDPE) and low density PE (LDPE) lifting prices in Asia in the near term if implemented.

“You could see trade flows shift, but the near-term impact will be higher prices in Asia,” said Patel on the company’s first-quarter earnings conference call.

“[As for] substitution from [LLDPE] to [HDPE] in end use applications – some of that can be done, but I don’t think it’s substantial,” he added.

Patel

LyondellBasell is a major producer of high density polyethylene (HDPE), which is not under the proposed China tariffs. It produces more limited amounts of LDPE, and “very little” LLDPE, Patel noted.

Westlake CEO Albert Chao believes China tariffs on US polymers are not likely to have much impact overall, and only negligible impact on the company itself, as only 1-2% of its revenues comes from China.

Even US producers with more direct exposure to tariffs would not be severely impacted, as the market will reshuffle trade flows and find a new balance, he said.

China will find additional supply from Europe or elsewhere, and US producers will step in to fill the void left by that switch. “The markets will rebalance,” Chao said on Westlake’s first-quarter earnings conference call.

While US chemical producers may be able to deal with China tariffs, the escalation of US trade disputes with China as well as uncertainty around the North American Free Trade Agreement (NAFTA) are “unhelpful on a macro level” as this is fostering uncertainty in the market, noted David Jukes, CEO-elect of the world’s second largest chemical distributor, Univar.

Univar sources most of the products it distributes from local markets, so the implementation of tariffs would not have a “huge or material impact”, the CEO-elect said.

However, positive resolution of trade issues is important, as it relates to business confidence.

“The NAFTA uncertainty needs to be resolved. Mexico is a small but important part of our business, and has shown good signs of recovery after the US election,” said Jukes.

While trade disputes can influence demand patterns, “we’ll watch it closely, deal with it, and manage our way through”, he added.

Jukes

With the US chemical industry experiencing boom times, there is concern that China tariffs on chemicals along with a wider trade war would derail the positive momentum.

“The US chemical industry is at the best point I’ve seen in many years. Having punitive duties on chemicals from China would make it cost prohibitive. US companies may move manufacturing operations elsewhere,” said Charlie Hinnant, CEO of LBB Specialties, the holding company that owns US chemical distributors Charkit Chemical and American International Chemical (AIC).

“We don’t mind change, but we don’t like political/arbitrary change. This has nothing to do with the fundamentals of manufacturing chemicals,” he added.

Hinnant

IMPORTING ETHANE VS PE

While China is proposing tariffs on US liquid propane, left off the list is ethane, which China plans to import for feedstock for several new cracker projects.

While China can source more propane from the Middle East, ethane imports can only come from the US, for now. But China would pay a large premium to import ethane from the US to make PE domestically instead of just importing the resin, said LyondellBasell CEO Patel.

Recently, companies started announcing plans to build China’s first crackers that would use ethane imported from overseas. These plants would provide ethylene for PE and other downstream plants.

The cost of shipping ethane in terms of the cost of ethylene and PE is about $450/tonne, or 20 cents/lb, said Patel.

In contrast, the corresponding cost for shipping PE is 8 cents/lb, he said. “There is a significant delta in terms of shipping gas versus PE.”

US President Donald Trump has always agitated for a dramatic shift in trade relations, promising to label China as a currency manipulator from day one of his presidency, withdraw from NAFTA and redraw the global trade map in favour of US manufacturers.

Yet the escalation of US-China tariff threats came as a surprise to many, roiling global financial markets. And when China’s proposed retaliatory tariffs came out on 4 April, US chemical equity prices took a dive.

With optimism on a positive resolution of the trade dispute now running high among US senior executives, a different outcome would shock chemical markets along with financial markets.

Additional reporting by Bill Bowen and Al Greenwood

By Joseph Chang