On 4 April 2018, China fired a retaliatory salvo in the mounting US trade war. China proposed additional 25% tariffs on 106 products, ranging from cars to agricultural products to chemicals. China targeted $50bn worth of US exports, striking back against rising US protectionism.
Two days ago, only pork products received the maximum 25% tariff level. Today 44 products related to chemicals or energy were put on notice with propane, polyethylene, and PVC garnering the biggest headlines in the chemicals space.
The shale gas renaissance has revitalized the North American natural gas liquid and petrochemical industry. From 2015 to 2025, we expect $50bn of NGL-related investment and $100bn of petrochemical investment. Much of this capital is geared towards the export market as seen in the table below:
China imported 8% of US propane production last year, and only imported 5% of US polyethylene and PVC production. The reliance on China expands through 2025, especially in propane as China propane dehydrogenation capacity undergoes a second capacity “wave” in 2019-2021. US producers could manage a short-term tariff via alternative logistics or directing flows to Europe, but a lasting tariff would threaten the next wave of export-based petrochemical investments.
How did we get here?
During the presidential campaign, then-candidate Trump frequently criticized China on the campaign stump.
- “They're ripping us left and right. Just take them to McDonald's and go back to the negotiating table.” – July 21, 2015
- "China is neither an ally or a friend-they want to beat us and own our country.” – Sept. 21, 2011
- In 2017, President Trump launches investigations into unfair foreign steel practices and Chinese intellectual property theft.
- January 2018 – Trump levies tariffs on solar panels and washing machines, primarily affecting China, South Korea, and Mexico.
- March 2018 – The US imposes 25% steel tariffs and 10% aluminum tariffs on all countries.
Eventually, NAFTA, EU, and several other countries were declared exempt from the tariff, leaving China as the primary target.
- 2 April 2018 – China responds for the first time, imposing tariffs on $3bn of US imports.
- 3 April 2018 – President Trump escalates the trade war by proposing tariffs on 1,300 Chinese goods worth $50bn as punishment for intellectual property theft.
- 4 April 2018 – Declaring that “it is only polite to reciprocate”, China matches the US’s $50bn target and proposes 25% tariffs on a wide array of US products. Many target Trump’s voter base, such as pork and soybeans from the Midwest and whiskey from Kentucky. Texas is also staunchly Republican, leading to propane and petrochemicals making the list.
How important is China to the propane and chemicals market?
China imported $3bn of propane and chemicals targeted in the latest tariff proposal. Propane accounted for 60% of 2017’s value and is the only growing sector since 2010. Propane exports felt shale’s impact sooner than petrochemicals, since it takes 5-7 years to build a new petrochemical complex. This will all change starting in 2018 as first wave of new petrochemical capacity reaches full production.
How important is China to the propane market?
In 2017, China imported 123,000 b/d of propane from the US worth $1.7bn. China is the US’s third largest propane importer after Japan and Mexico. China lowered the previous tariff to 1% because China’s PDH capacity is surging. PDH operation prefers high-purity HD2 grade propane that US exporters specialize in and is not easily backfilled by other sources. If the 25% tariff comes to fruition, US propane exporters could target lower-valued European steamcracker demand.
How important is China to the polyethylene market?
The US was China’s sixth largest PE source in 2017, behind several Middle Eastern and Asian countries. From 2018 to 2025, exports grow nearly 1.5 mtpa as long-awaited ethane-based investments come online. Ethane currently has a $400/ton advantage versus Asian naphtha cracking. 25% tariffs would primarily affect LDPE and LLDPE, requiring repositioning between the US, Middle East, and Europe but US producers could still supply Chinese markets via local JVs.
How important is China to the PVC market?
In 2007, shale economics and the domestic housing collapse led to a shift upward in the importance of PVC exports to US producers. China, meanwhile, was adding massive domestic PVC capacity. Today, almost 40% of US PVC goes offshore and future expansions target additional export volumes. China is a key trade partner, absorbing around 11% of all US PVC exports. EDC is tariff targeted also, so the potential impact on the full chain is actually greater.
- China’s tariff announcement was met with assurances from President Trump that we are not in a trade war. Trump’s National Economic Council director has already dialed back the tension, insisting tariffs may not take effect and could be a negotiating tactic.
- If China actually levies these additional 25% tariffs against US products, we expect the following to occur:
- Propane – The initial effect on US propane exports would be minimal, as it would take time for China to source backup propane. The US is the largest propane exporter in the world and is the primary propane growth engine in the world, especially when OPEC curtails oil production.
Propane prices rose substantially last year when US production growth underwhelmed, requiring the cancellation of multiple US propane export cargoes. Longer term, the US would target European steam cracker and PDH demand while China dominates Middle Eastern cargoes.
- Polyethylene and other ethylene derivatives – if the tariff goes through, Middle Eastern producers would be the incremental polyethylene supplier to China. Middle Eastern volumes allocated to Europe or Africa would face increasing competition from US material. But if US producers had to target China, US netbacks could fall $200/ton.