The problem with wars, trade or otherwise, is that you know when they start, but you can never know when (and how) they will end. Today, China announced potential counter-measures against the United States’ promised tariffs against Chinese imports, impacting 50 billion dollars of U.S. exports.
Let’s be clear about something. We are not at “war” yet; both sides have rattled their tariff-sabers and are making a lot of noise, in order (one can only hope) that the other side will back off or will be more willing to provide concessions in future negotiations. As the Allies and Germany during World War II’s “Phoney War” period, China and the U.S. have declared their willingness to fight, but have yet to get any actual fighting started.
In today’s round of tariff volleys from China, the chemical industry became one of the targets. There are 44 chemicals, petrochemicals and feedstocks included in the list of products that could see a 25% tariff. For the North American polyethylene industry, of particular concern are the inclusion of low density polyethylene as well as some trade fractions of linear low density polyethylene and EVA copolymers. The following charts show the volume of polyethylene-related U.S. exports that would be affected.
China Reported Imports, LDPE (thousand tons)
Source: ITC, ChemPMC Estimates
China Reported Imports from the U.S., LLDPE & Other Alpha Olefin Copolymers (thousand tons)
Source: ITC, ChemPMC Estimates
China Reported Imports, Other EVA Copolymers
Source: ITC, ChemPMC Estimates
In the grand scheme of things, the numbers are not that big. But, looking forward, these (as well as additional measures China may enact in the future against polyethylene) represent a grave danger for the industry. As detailed in our most recent white paper, exports out of the region are a necessity for North American polyethylene producers, as they gear up their brand spanking new plants in the U.S. Gulf Coast.
The prospect of a protracted trade war between China and the U.S. is not a welcomed sight, neither for companies that have already sunk capital in those investments, nor for those that may be considering future investments in the segment. Yes, the U.S. can find other markets for polyethylene. And yes, the margins for polyethylene are high enough for producers to be able to reach and compete in any market they select. But no, it will not be a painless transition. And yes, it may have an impact in polyethylene’s profitability going forward.
The other interesting (to call it something) measure that could impact polyolefins are tariffs against liquid propane. In 2017, the U.S. exported 45 million barrels of propane to China, representing 14% of the total U.S. exports.
U.S. Reported Exports, Propane (Million Barrels)
Source: USITC
Tariffs against propane are a double edge sword that may have some unintended consequences. For the U.S., Chinese tariffs would require looking for fresh markets for its propane; however, these measures may delay a recovery in propane prices in the region (maybe increasing the attractiveness of PDH to PP investments in North America). For China, tariffs will require the country to find 24% of its supplies from other producing regions. And it may result in higher propane prices, impacting the multiple PDH to PP investments in the country, that were counting on cheap propane coming from the U.S.
China Reported Propane Imports, Million Metric Tons
Source: ITC, ChemPMC Estimates
Not everything is said and done. And we sincerely hope that cooler heads prevail, as a trade war may derail the incipient global economic recovery and prove negative for all parties, not just the U.S. and China. More to come on this subject. Please leave us a comment with your thoughts.
