Strategy and Grade Slate Differentiation Key to Surviving Trade Wars
  

 


China is the largest global import market for PE.  With annual demand upwards of 28 million tons in 2018, China has long been a target destination for shale-driven U.S. polyethylene exports, but with an additional 25% in tariff fees the cost structure changes significantly.  
  


 Plastic industry stakeholders are hoping for some positive news this week as trade discussions resume.  Chinese officials, led by Vice Commerce Minister Wang Shouwen, are set to meet with Treasury Undersecretary David Malpass over the next two days in Washington.
 
On August 8, China released its list of retaliatory tariffs on $16 billion in U.S. goods in response to the Office of the United States Trade Representative’s (USTR) August 7 issuance of list 2 of Section 301 tariffs on $16 billion in Chinese imports.  This latest Chinese Ministry of Finance’s list includes an additional 219 tariff items that were added to the list China originally released in June, and puts US polyethylene squarely in the crosshairs.   
 
China is the largest global import market for PE.  With annual demand upwards of 28 million tons in 2018, China has long been a target destination for shale-driven U.S. polyethylene exports, but with an additional 25% in tariff fees the cost structure changes significantly.  While this is good news for cost advantaged Middle Eastern producers,  already the largest exporters to China, for the industry as a whole it could signal yet another trade-flow rewrite.
  
  

Townsend’s take:     
Terry Bourgeois, Editor of Townsend’s Plastic Market Monthly is already fielding calls from U.S. converters wondering about the potential impact on resin prices.  “We are following this closely.  While it’s possible we will see some downward movement once tariffs are in-force and material once destined for China is reallocated to the domestic market, a chain reaction could ultimately have damaging consequences and at this point we’re expecting that suppliers will be keeping a tight rein on price adjustments.”   
 
It's of course possible major producers here may leverage the advantaged feedstock situation to lower the price.  In addition, major producers are mostly international, and they could ship more resins (produced elsewhere) to China without paying this high tariff.  Another key point to remember is that the depreciation of RMB (about 10% ) weakens the buying power to buy resins from USA.  But meanwhile it helps China’s exports (like fabricated products) to the U.S.
 
“It will ultimately all come down to strategy and level of grade slate differentiation” says Roberto Ribeiro, President of Townsend Solutions.  “Dow Chemical is a good example.  With new 1.5  million t/y of polyethylene capacity and a focus on packaging and high value-added grades like Elite, Versify and Affinity, the company is already focusing on the Americas as an export destination, while Saudi Aramco/Dow Chemical JV Sadara’s new 1.3 million-t/y polyethylene capacity will be destined for Asian countries (including China). With Sadara, Dow Chemical Argentina and other operations in Asia and Europe, the company is aligning to supply convertors globally.   It’s not an American supply game, it’s a global supply game.”
 
China is the largest global import market for PE and half of this demand is dependent on imports.  In 2017 U.S. PE imports to China exceeded 700,000 tons at a value of $1 billion.  This volume represents about 5% of China’s total PE imports.  As more capacity comes on stream in the US, that number is forecast to exceed 1 MM tons by 2020.  In the first half of 2018, the US exported nearly 450,000 tons of PE and looked on track to perhaps exceed 1 million tons for the calendar year.    At tariff rates of 25%, however, it is inevitable that producers will now need a new playbook to manage inventory and netbacks.
 
The most common polyethylene grades from the U.S. to China during the first half of 2018 were:



  
  




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