Risk to US PE exports escalates
The risk of a US-China trade war has risen even further with President Trump’s announcement of plans for a further $100bn of tariffs against Chinese exports to the US.
This is in response to the Chinese reaction to the initial US plan for $50bn of tariffs on Chinese imports.
This is turning out to be a classic cycle of tit-for-tat reactions from the US and China that could escal- ate to a full-blown trade war causing a global economic recession.
On 3 April, China’s reaction to that first round of $50bn US tariffs included proposed tariffs of 25% on US exports of low density polyethylene (LDPE) and linear-low density polyethylene (LLDPE).
The same tariffs could also be levied on US polycarbonate, polyvinyl chloride (PVC), plastic products in general, acrylonitrile (ACN), catalysts, lubricants, epoxy resin, acrylic polymers, vinyl polymers, polyamides (nylon) and surfactants.
Focusing on polyethylene (PE), China’s tariffs are an immediate threat to some $540m of US sales in 2018.
This is based on assuming that the US will again export 12.5% of its total LDPE and LLDPE exports to China in 2018, as was the case in 2017.
These tonnes – 438,000 tonnes – were then multiplied by average CFR China prices for LDPE film grade and LLDPE C4, C6 and C8 film grades in the 12 months from April 2017 until March 2018.
This estimate is bound to be wrong but it gives an idea of the scale of what is immediately at stake for US producers.
Unfortunately, this is just the tip of a potential iceberg for the global PE business.
CHINA PUBLIC REACTION
Even with the big cost advantage that US production enjoys, 25% tariffs could make LDPE and LLDPE exports to China entirely unviable.
And even if the tariffs are not imposed, or the 25% tariffs do not entirely stop exports, it would be wise not to underestimate the power of Chinese public opinion. Chinese traders may simply stop buying all US PE in reaction to US trade policy.
Last month, the Global Times, the Chinese government-run newspaper, called for a “People’s War” against US trade policy.
A Chinese buyers’ strike would obviously also put US high-density polyethylene (HDPE) exports to China under threat. Based on the same approach used above, this raises the 2018 revenue threat to US producers to $885m.
US NEEDS CHINA MORE
The US/China PE export and import data also tell us this: When it comes to PE, the US needs China more than China needs the US.
While 12.5% of total US LDPE and LLDPE exports in 2017 went to China, China imports of these two polymers from the US only accounted for 6% of its LDPE and LLDPE imports.
The US can ill afford a 12.5% hole in its export trade (12.3% if you include HDPE) during its largest-ever wave of new capacity.
From China’s perspective, it doesn’t have to buy US LLDPE and LDPE because US material accounts for such a small percentage of total imports (when you add in HDPE, the US share of Chinese imports fell to 5.7% in 2017).
China can instead buy more PE from other trading partners. These partners include all of the Middle East as the entire region is part of .
Also in the BRI is southeast Asia, which of course includes Singapore and Thailand – two other major polyethylene exporters.
Specifically on the Middle East, it seems very likely that the US will pull out of the Iranian nuclear deal. This could pull China and Iran – a BRI member – even closer together geopolitically and economically.
This may further cement their trading relationship in PE. Less than 1% of total Chinese HDPE imports came from Iran in 2007. This had risen to 17% last year. The corresponding increase in LDPE was from less than 1% to 18%.
We also have to consider what the implications would be for global PE markets if the US is unable to export to China.
The critical period is 2018-2025. During these eight years, total US PE capacity will rise by 9.6m tonnes – a 59% increase over capacity in 2017, according to the .
This increase will occur as US demand growth averages just 1.5%/year.
Of some 200m tonnes of global net PE deficits in 2018-2025, China will account for no less than 46%.
Narrow the numbers down to just this year and out of 22m tonnes of net deficits, China will be responsible for 49%.
US PE producers have to grow market share in China in 2018-2015 in order to be able to comfortably place their extra volumes – assuming, of course, that the ICIS Supply & Demand base case has not overestimated China’s deficits.
Imagine, therefore, that the China market is entirely shut off to US producers.
The US would either have to cut back on production or export greater-than-anticipated volumes to smaller deficit regions such as South and Central America and Europe.
The latter response seems probable because of production cost advantages and the need to pay back debt incurred by building new plants.
Five will not go into four. This year alone, we estimate the US will need to export around 724,000 tonnes of LDPE, LLDPE and HDPE to China to maintain 2017’s level of 12.3% of total exports. If these volumes go elsewhere, this could badly disrupt other deficit regions.
Higher cost naphtha-based producers in Europe may come under severe margin pressure as a flood of low cost US imports arrive. The producers might respond with antidumping petitions against the US and/or calls for other forms of trade protection.
The new US approach to international trade may end up antagonising Europe, as well as China. This could make new trade barriers against US PE more likely.
BROADER GLOBAL PICTURE
None of this may happen, of course. The US and China could reach a deal during negotiations that prevents a trade war. But clearly there is a risk of the opposite outcome.
What could be a concern for the negotiations is that the anti-free-traders in the White House are in the ascendancy.
John Bolton will soon become the new National Security Advisor with Mike Pompeo set to take over as Secretary of State. This could add support to existing White House officials such as Robert Lighthizer and Peter Navarro, who advocate a tougher approach to China.
Or maybe the new US approach to trade will work. Perhaps, as many of President Trump’s supporters will argue, tough is what is needed to win concessions from China.
But Chinese politicians could be asked to make concessions during the negotiations that they would not be able to sell to the Chinese people.
They might, as a result, walk away from the talks.
This depends on whether China can afford to walk away from negotiations.
It can be argued that China needs more, not less, access to US intellectual property – the core of the US/China trade dispute – if it is to escape its middle-income trap.
Another view is that it does not need US technologies anymore because of:
- The progress it has already made through state-funded innovation in higher value manufacturing sectors, such as electric vehicles and the mobile internet economy, and
- Its ever-closer economic and geopolitical relationships with Japan, South Korea and the EU.