By John Richardson
WELL, THAT DIDN’T LAST LONG. In the run-up to this year’s presidential election, Donald Trump said he planned to impose additional tariffs of 60% on Chinese imports, but this week he mentioned an extra tariff of only 10%.
Watch this space, though, because we are in a world of confusion and muddle where anything might happen from a full-blown global trade war to compromises, lots of deals and no major changes to global chemicals and other trade flows. I am betting on somewhere in between these two extremes. I think we will end up with some changes in trade flows, but mainly just a reshuffling of the pack.
The US is dependent on low-cost imports and the imports must come from somewhere with the working class in the US a key part of the president elect’s constituency.
Further, in practical terms at least in the short and medium-term, it is going to be hard and extremely risky to unwind the complex integration of supply chains. More reshoring to the US, the feasibility of which will vary manufacturing sector by manufacturing sector, seems likely to take a good while.
Take Mexico, the US and Canada as an example of the complexity of supply chains. This week saw the threats of additional 25% tariffs on Mexica and Canadian exports to the US.
“Kim Glas, the chief executive of the National Council of Textile Organizations, which represents American textile makers, said that her industry welcomed an increase on tariffs on Chinese textiles and apparel, but that imposing tariffs on Mexican and Canadian goods could undermine American manufacturing,” wrote the New York Times in this 27 November article.
Factories in the United States, Mexico and Canada were linked together in a co-production chain under the current trade agreement, Glas told the NYT.
“The US textile industry exports 53 percent of its products to factories in Mexico and Canada, where they are turned into finished products that then come back into the United States,” she added.
Of great direct relevance to the US refining-to-chemicals industries is the threat of a 25% additional levy on US imports of Canadian and Mexican crude oil.
My ICIS colleague, Al Greenwood, wrote the following in this 27 November ICIS News article:
US refineries are generally designed to process grades of crude that are heavier than the oil it produces domestically from shale, said Michael Connolly, principal refining analyst for ICIS.
As a result, the US exports its surplus of light oil and imports the heavier grades needed by its refineries.
Those imports help fill out refining units that process heavier crude fractions, such as hydrocrackers, cokers, base oil units and fluid catalytic cracking (FCC) units, Connolly said.
In 2023, the majority of those imports came from Canada and Mexico, as shown in the following table showing the top five sources of foreign crude.
No less than 59.9% of US imports of crude came from Canada in 2024 with 11.3% coming from Mexico, according to the US-based Energy Information Administration.
Al added that rare-earth models needed to manufacture catalysts for FCCS are predominantly imported by the US from China.
Global supply chains are a very intricately packed and arranged apple cart. Let’s be honest with ourselves. Nobody can predict where all the apples will land if the apple cart is upended.
The risks for US polyethylene sales in China
For the US chemicals industry, a paramount risk is that it will lose ground in China. This happened in 2017 when China responded to a previous round of Trump tariffs on Chinese exports by increasing import duties on US polyethylene (PE) and other chemicals and polymers.
The story since then, focusing just on US-China PE trade flows, was neatly summarised by my ICIS colleague, Joe Chang, in this 25 July 2024 ICIS news article:
First, there were tariff rollbacks by the US as well as China by December 2019 on the striking of a trade deal. Many tariffs remained in place, though at lower rates.
Then critically in February 2020, China offered importers waivers on certain tariffs imposed on US PE and other plastics and chemicals imports.
For various types of US high density PE (HDPE) and linear low-density PE (LLDPE), on which a 34% tariff rate applied, Chinese importers could apply for a waiver and instead pay the pre-trade war duty of 6.5%.
That explains the massive surge in US HDPE and LLDPE exports to China since then.
From 2019 levels, US exports of HDPE rose more than four-fold to over 800,000 tonnes in 2023. For LLDPE, exports jumped almost seven-fold to almost 1.4 million tonnes in 2023. US low density PE (LDPE) exports, which were not included in the waivers, saw a much more modest rise of over 1.5x during the period.”
And, of course, the US PE industry’s strong feedstock-cost position, thanks to very competitive, has further supported the boom in its business with China.
The chart below, which takes us up until September 2024 – the latest month for which US trade data are available and starting from January 2019 – shows the increases in US HDPE and LLDPE exports to China as percentages of total US exports.
We need to also overlay this discussion with analysis of the winners and losers in the China market in the 34 months after the end of the 1992-2021 Chemicals Supercycle (January 2022 until October 2024, the latest month for which Chinese import data is available) versus the 34 months before the end of the Supercycle. This was from March 2019 until December 2021.
Let’s start with HDPE. The chart below, updated to include the October 2024 China Customs department and ICIS Pricing numbers, will be familiar to regular readers of the blog.
We can combine the China import data with ICIS price assessments to get a rough estimate of China sales turnover losses and gains when these 34-month periods are compared.
The above chart shows average CFR China HDPE injection, film, blow moulding and HDPE 100 pipe grade prices multiplied by imports reported by China from its top ten trading partners. I subtracted the 2022-2024 numbers from the 2019-2021 figures to calculate losses since the end of the Supercycle. To calculate gains I did the reverse, subtracting 2019-2021 numbers from the 2022-2024 data.
As you can see, Saudi Arabia saw the biggest sales turnover losses at around $2bn followed by Iran at $1.8bn and South Korea $504bn. The only winner out of the top ten was the US which gained $859m.
In the 34 months immediately before the end of the Supercycle, China reported 5m tonnes of imports from Saudi Arabia. This fell to just 3m tonnes in the 34 months after the end of the Supercycle. Imports from Iran were down from 3.9m tonnes to 2.1m tonnes and South Korea down from 2.6m tonnes from 2.1m tonnes.
This is obviously the result of the fall in tariffs on US imports from 34% to 6.5%. Also happening here is, as mentioned, is the end of the Supercycle.
A clear sign of the economic crisis confronting China is 25 consecutive months of declining producer prices. Consumer price inflation is also very low. In such a deflationary or disinflationary environment, costs really, really matter and the US is a low-cost supplier of PE.
Another factor behind the decline in imports from South Korea, Iran and South Korea etc is the rise in China’s HDPE self-sufficiency. In March 2019-December 2021, China’s HDPE imports totalled 22.6m tonnes. This fell to 15.8m tonnes in January 2022-October 2021. The US has bucked the trend because of its cost position; it has won a bigger share of a declining import market.
LLDPE is a slightly different story as China’s self-sufficiency hasn’t shifted much. March 2019-December 2021 imports totalled 17m tonnes versus 16.4m tonnes in January 2022-October 2024.
Imports reported from Saudi Arabia only declined from 3.4m tonnes to 3.2m tonnes. Imports from the rest of China’s top ten trading partners saw similar minor movements with one very big exception: Imports from the US increased from 1m tonnes to no less than 2.9m tonnes. This is reflected in the extraordinary chart below.
The US gained no less than $2.2bn in China sales turnover, greatly overshadowing minor gains by Spain, Canada, South Korea and the UAE.
Here are those among China’s top ten LLDPE trading partners that lost ground.
Conclusion: The Infinite Improbability Drive
As I said, we are in a world of muddle and confusion. Almost anything could happen which brings to my mind the fabulous science fiction series of books and TV and radio shows, The Hitchhiker’s Guide to the Galaxy, and its Infinite Improbability Drive. This is defined as such:
The infinite improbability drive is a wonderful new method of crossing interstellar distances in a mere second, without all that tedious mucking about in hyperspace. As soon as the ship’s drive reaches infinite Improbability, it passes through every conceivable point in every conceivable universe simultaneously.
In one of any number of scenarios, let’s assume that China responds to increased US tariffs with increased tariffs on imports of US PE, as it did in 2017. Then the US loss could be to the gain of South Korea, Iran and South Korea etc.
But, as we saw in 2017, the US might not lose out as whole. Its export flows to Southeast Asia, Europe and Latin America might increase as other countries fill the gap created in China.
Here’s some advice: Put the ICIS data into something akin to an Infinite Improbability Drive and you might get the answers you need.
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