INDUSTRY INSIGHT

Impact from China-US tariffs on chemical markets

China’s imposition of tariffs on imports from the US may have lasting implications on petrochemical markets, creating new opportunities for GCC producers

By Roger Lee, Managing Director, Tecnon OrbiChem

A new 25% tariff on imports of selected commodities from the US, imposed by the Chinese government in retaliation for a similar move by the Trump administration, will affect a wide range of materials, including a number of petrochemical feedstocks, intermediates and polymers. Markets for some products listed in the measures will feel the impact more than others.

Liquid propane

In 2017, China imported 13,352,000 tons of liquid propane, with 3,375,000 tons (25.3% of the total) coming from the US. Propane dehydrogenation (PDH) plants in China currently enjoy good profits. If a 25% tariff is added to liquid propane imports from the US, those imports would probably stop. The UAE is the biggest source of imported propane for China, accounting for 4,262,800 tons, or 32% of imports in 2017, and could possibly export more to China. However, the overall cost to PDH units would likely increase as trade flows readjust.

The Chinese olefins and polyolefins industries would be impacted, in that PDH plants using imported propane as feedstock would have to find an alternative, face an extra cost burden – or both. Chinese companies that operate PDH plants include Tianjin Bohai Chemical, Zhejiang Satellite Energy, Wanhua Group, Oriental Energy, Shaoxing Sanyuan and Hebei Haiwei.

PDH plants in China are mostly producing propylene for conversion to polypropylene, acrylic acid, butanol, isobutanol etc. Around 50% of the propylene produced from the PDH route is converted to polypropylene.

The impact on the Chinese market was reflected in polypropylene raffia futures prices on the Dalian Commodity Exchange, which increased from around Rmb8815/ton in early April to around Rmb9010/ton by mid-month.

LDPE

China imported 155,000 tons of LDPE from the US in 2017, accounting for 6.5% of a total of 2,373,000 tons of imports from all over the world.

If the new tariffs are confirmed, the impact will be minimal, because the main source of imports to China is Middle Eastern countries. US LDPE could be substituted relatively easily by cargos from these sources. In addition, new Chinese domestic production will be booming from 2018 to 2020. Few people expect that supply will become tight. Some traders stopped taking US LDPE immediately after the announcement was published. LDPE film grade spot prices increased Rmb250/ton from Rmb9450-9650/ton in early April to Rmb9700-9900/ton mid-month.

“The UAE is the biggest source of imported propane for China, accounting for 32% of imports in 2017, and could possibly export more to China.”

Acrylonitrile

In 2017, China imported about 60,000 tons of acrylonitrile from the US – 22.2% of a total import volume of 270,000 tons. The top two acrylonitrile exporters to China are South Korea (120,000 tons) and Taiwan (73,000 tons). It is understood that US acrylonitrile is mainly sold to one trader and two ABS producers Zhenjiang Qimei and LG Yongxing.

If the import tax is imposed, traders may stop purchases. The two end-users will wait and see what happens to final prices. The decision may also be affected by the amount of end product (ABS, acrylic fibre etc.) that is exported – and thus subject to duty draw-back.

According to LG Yongxing, only a small percentage (less than 5%) of the ABS they produce is exported and the US is not their main source of acrylonitrile. Most of their ABS output is supplied to the Chinese domestic market.

Supply of acrylonitrile in China is expected to tighten to some extent in 2018, due to a long list of scheduled shutdowns at Chinese acrylonitrile producers.

The tariff issue may support acrylonitrile prices at their current elevated level for a longer period of time. At least, as a hot topic in the market, it is being used by sellers as a reason to increase prices in the near term.

Cellulose acetate

The total volume of cellulose acetate imported to China in 2017 was 58,481 tons. Of this, around 72% originated in the US. Although the tonnages are small compared to other listed commodities, the new tariffs will have a big influence on the cellulose acetate market.

One interesting factor is that the major cellulose acetate producer, Nantong Cellulose Acetate Company, is a joint venture founded by China National Tobacco Corporation and Celanese, a US company. So if decreased imports cause domestic prices to increase, the US company will also benefit, in this respect.

The cellulose acetate case illustrates the fact that the current trade dispute between the US and China will not only change global trade flows, but could also affect the operations of US companies in China.

Epoxy resins

For epoxy resins, the impact of new tariffs will be limited, since the volume imported from the US makes up only a small share of the total imported volume.

From 2015, the imported volume of epoxy resins has increased gradually, reaching a record 275,000 tons in 2017. In 2017, the US was the third largest exporter to China accounting for 33,000 tons or an 11.7% share. However, compared to total Chinese consumption in 2017 of around 1.3 million tons, imports from the US only represented 2.3% of the market.

Polycarbonate (PC)

For polycarbonate, there is also limited supply side impact, but there may be more on the demand side. Polycarbonate from the US accounts for an 8% share of Chinese imports and the US ranks 7th among exporting countries. The annual imported volume from the US has been in the range 100-150,000 tons in the past several years, taking a 7-11% share of the import market. But more than 80% of the volume imported from the US is supplied to the onward-processing trade, which will not be impacted by the tariff.

Major producers of PC in the US are Covestro and SABIC. Covestro also has large capacity in China and Thailand. Although Covestro has plants in China, it supplies some grades of PC from plants outside China, but can switch the supply of these grades from the US to other plants if the duty is added – or, as is the case now, when there are turnarounds at Chinese units. SABIC can also supply the China market from plants outside the US and it is also building a JV plant in China. New capacity under construction in China will also offset the impact of import restrictions on supply, both this year and next year.

On the demand side, in China, environment and energy (E&E) and automobiles are important applications for PC. Together, they account for more than a 50% share of total consumption. These two areas also account for more than a 40% share of China’s export business to the US. If the US imposes higher tariffs on these products from China, their competiveness will be hit and plants manufacturing them product will see orders decline, thus impacting upstream demand for PC.

“The tariff issue may support acrylonitrile prices at their current elevated level for a longer period of time.”

EDC

Imports of EDC to China in 2017 totaled 375,407 tons, with 260,565 tons coming from the US – 69% of the total import volume. 67% of this trade was for general use, with 33% for the onward –processing trade in 2017.

As the implementation date and other details of the new tariffs have not yet been announced, Chinese markets are adopting a wait-and-see attitude for the moment, although some importers have put a hold on EDC imports. If implemented, an extra 25%import duty means a substantial rise in EDC import costs. In such a case, Chinese PVC producers who currently import EDC will, possibly, choose to buy ethylene and produce EDC themselves, if in doing so, they can lower costs. US EDC exporters could also decrease EDC price offers in order to maintain sales to China, despite the high import tariff, if inventory pressure, caused by high operation rates and good caustic soda market prices, means there is an incentive to do so.

PVC

Chinese imports of PVC in 2017 totaled 771,587 tons, with 306,539 tons from the US – 40% of the total volume. Most PVC import trade (92% of the total volume in 2017) is for onward-processing and re-export. So, due to duty draw-back, most US PVC exports will not be affected by the tariff increases and the trade war may have less of an effect on PVC compared with EDC.

Polyamide 66 Polymer

China is a net PA66 importer. In 2017, China imported 270,000 tons of PA66, accounting for 39% of the 700,000 tons of total consumption. Of this 270,000 tons of imported PA66, cargoes from the USA accounted for roughly 17% (47,000 tons) last year.

PA66 originating in the US has been subject to anti-dumping duty since 2009, and around half of the imported volume from the US is for the onward processing business, which can be exempt from anti-dumping and customs duties. This portion of the trade won’t be affected by the tariff increases. However, the remainder will face cost increases if the higher tariffs take effect.

Buyers are already cautious about purchasing cargoes originating from the US, due to these uncertainties, and prefer to purchase from local plants. A source at a local producer confirms this, saying that its cargoes were sold-out soon after news of the tariffs broke. Local plants could benefit from the tariff increases, but upstream adiponitrile and HMDA raw material supply shortages remain a serious problem, hampering domestic production.

On 15 June 2018, the United States Trade Representative (USTR) released a list of Chinese imports that will be hit with additional tariffs of 25%, effective 6 July. The following day, Beijing announced that it will impose an additional 25% tariff, also starting 6 July, on 545 products from the United States including agricultural products, automobiles and aquatic products, according to the Ministry of Finance.

Chinese regulators also are considering a tariff hike on an additional 114 products including medical equipment and petrochemicals, the Ministry said. It said a decision regarding timing of the implementation of these new tariffs and which products would finally be affected would be announced at a later date.

This mirrors Trump’s announcement that the initial list of products may be extended to include chemicals such as polyethylene, poly vinyl chloride, polyamides, etc. No date for implementation has been fixed for these products as a public consultation is still underway in this case. Once this process is finished, a final list and date will be released.

Thus, so far, petrochemicals have not been affected on either side of this trade war; but there are expectations that at least some of the chemicals on the lists may be affected.

“New capacity under construction in China will also offset the impact of import restrictions on supply, both this year and next year.”