First trade war casualties in chemicals and beyond

27 September 2018 17:13 Source:ICIS Chemical Business

With $250bn in US trade tariffs now in place and $110bn from China, we are starting to see some early casualties in this trade war.

Owners of US chemical projects which are export oriented, and were planned with the colossal China market in mind, are now reconsidering these plans. And on 27 September one – Austria’s Lenzing – went public with the news that it has shelved plans for construction of a specialty fibre plant at Mobile, Alabama.

The company cited “the rising likelihood of increasing trade tariffs, paired with the potential surge in construction costs due to the buoyant US labour market” for the decision.

The 90,000 tonne/year project, when announced in 2016, had a $293m investment with completion scheduled for the first quarter of 2019.

Lenzing claimed it would have been the largest Tencel lyocell fibre plant in the world.

One wonders if this could be the tip of the iceberg. The American Chemistry Council said earlier in September that a total of 333 US chemical projects worth an accumulative $202.4bn have been announced since 2010.

Of those, 53% are complete or underway, while 41% of projects are still in the planning phase.

These projects rely not only on the availability of cheap and abundant ethane and other natural gas liquid (NGL) feedstocks, but increasingly on export markets.

With China business under threat, and uncertainty around the future of the North Atlantic Free Trade Area (NAFTA), the country’s three largest chemical export markets are in jeopardy – Canada, Mexico and China.

CHINA PVC COLLAPSES

ICIS reported another early trade war victim this week – China polyvinyl chloride (PVC). The US has imposed tariffs on a range of Chinese finished goods which contain PVC.

The products totalled around $120m in general imports from China to the US last year, according to US International Trade Commission (ITC) data.

This has spooked convertors in China who are now holding back on PVC raw material purchases, reducing demand.

Prices dived by 9% in the space of a week, not helped by an influx of cheap US PVC.

China has not yet imposed a tariff on US PVC. China was the US’s second-largest buyer of export PVC in 2017, according to the ITC.

US FACTORIES AND CONSUMERS HIT

Ford Motor Company CEO, James Hackett, said this week that 25% steel and 10% aluminium tariffs have cost his company $1bn, as domestic prices rose in tandem with higher import prices.

The tariffs will add $400 to the price of a car, according to the American Automotive Policy Council.

If President Trump proceeds with a 25% tax on imported cars and parts, new car prices will rise by $6,000-$7,000 per vehicle, said US Senate Finance Committee Chairman Orrin Hatch, who is a Republican.

The earlier January round of US tariffs has already impacted some white or electronics markets.

For example, since then US washing machine price inflation has spiked from below zero (for the last four years) up to 16% in the first half of the year.

And on a smaller scale, the US Palm Beach Post reported that some waiting times for aluminium hurricane shutters have gone from one up to four months as manufacturers switch to scarcer domestic supplies of the product.

The latest round of tariffs will increase prices for $42bn of US consumer goods, according to some estimates.

This is bound to fuel inflation and this week the US Federal Reserve raised interest rates for the third time this year.

Friedrich Heinemann, head of the ZEW research department Corporate Taxation and Public Finance at the Centre for European Economic Research (ZEW) in Mannheim, Germany, said: “...the new tariffs imposed on Chinese imports are likely to result in more inflationary pressure. As a consequence, US consumers will be the ones to bear the economic burden of Donald Trump’s punitive tariffs in the form of higher prices for Chinese goods.”

Click here to see the ICIS trade war topic page.

By Will Beacham