IHS Markit has analyzed the potential implications of the Chinese tariffs on the US and global petrochemical and plastics industries. Escalations in the trade dispute between China and the US have driven both countries to respond with tariffs that could derail a global economic boom that has benefited the global petrochemical industry.
London/UK — According to the analysis publish by IHS Markit, the US industry, in particular, has experienced a renaissance in productivity and profitability due to its abundant supply of advantaged shale gas feedstocks, which has enabled the industry to invest significantly in capacity and new production, much of which is intended for export to feed hungry Asian and Chinese markets. While the US has many resources, available investment capital, low-cost energy and feedstocks, as well as chemical technology, China requires basic chemicals used in the manufacturing of durable and non-durable consumer goods for exports and increasingly for domestic consumption.
Tit for Tat
In 2017, the US imported $ 505 billion in goods from China, and China imported $ 130 billion in goods from the US. The trade deficit of $ 375 billion is one of the key issues of the Trump administration, with numerous tariffs imposed across many business sectors. The Chinese have quickly responded in kind, with more tariffs on US imports, many of which take aim at the petrochemical and plastics sectors. The IHS Markit economics team stated that a potential trade war between the US and China could derail the global economic boom.
While the trade of energy and chemicals represent a small portion of the total trade between the two countries, within a given petrochemical value-chain, the impact of a trade war could be significant. Most notably, the analysts expect impacts to be experienced in the propane, polyethylene (PE), which is the world’s most used plastic, and the vinyls (EDC and PVC) value chains.
Regardless of any Chinese tariffs in place, US propane production will likely continue to increase, since LPG (liquefied petroleum gas or propane) is produced as a by-product of refining and natural gas processing. In the near-term, Mont Belvieu (Texas) propane prices (the US benchmark) could face downward pressure if China reduces import volumes from the US. In 2017, the US exported 3.4 million metric tons to China of propane, according to IHS Markit.
The additional retaliatory tariffs announced by China for US products includes certain grades of polyethylene. While certain PE products were identified in the tariff announcements, there are still many unknowns that make estimating the impacts more challenging — the timing of the implementation of announced tariffs is unclear, and there is uncertainty as to whether or not the list of affected products will be expanded. Currently, China is about 60 % self-sufficient in terms of overall PE consumption. In 2017, total US PE exports to China were just under one million tons, with exports to China representing about 17 % of the total PE exports from the US.
Vinyls Value Chain (EDC, PVC)
The US exports between 300,000 metric tons and 350,000 metric tons of ethylene dichloride (EDC) to China annually, virtually all of which is consumed for PVC (polyvinyl chloride) and solvents production. Exports to China account for about two percent of US EDC production and about 24 % of US EDC exports. Chinese EDC capacity is insufficient to make up the deficit if imported EDC in that quantity were to cease. In contrast to EDC, Chinese PVC operating rates could be increased to supply an equivalent amount of PVC to the domestic market with no imports from the US. However, IHS Markit estimates that the cost to produce the incremental PVC production in China would be approximately five percent to 10 % higher than US imported PVC prices before the imposition of the 25 % tariff.