How a trade war could impact the US petrochemical capacity wave

As the U.S. economic expansion nears the longest in history, other countries' economies are slowing and trade battles are expected to hit the hardest just as major new U.S. capacity is starting up.

The US-China trade war will hit US polyethylene exports to China just when major new capacity is starting up.

J.P. Morgan now expects the U.S. will proceed with tariffs on all Chinese goods by the end of 2019, the company said on October 4, 2018. If the prediction is correct, it could spell trouble for the global economy and U.S. investment, an analyst told Petrochemical Update.

The global economy began to grow in 2016 and has largely maintained that into the beginning of 2018. 

The latest global manufacturing PMI (Purchasing Manager’s Index) data shows that the major global economies are still in expansion mode with the exception of China.  When the manufacturing PMI is above 50, there is expansion.

However, momentum has declined in recent months. The global economic upswing is becoming less synchronized, with Europe slowing slightly and China slowing more.

Global Manufacturing PMI

Image: ICIS. Data through September 2018. US = ISM, Eurozone = IHS Markit, China = Caixin

"Emerging markets such as Turkey, Argentina, Brazil and South Africa are being pressured by U.S. interest rate hikes and a stronger U.S. dollar,” Joseph Chang, Global Editor for ICIS Chemical Business said. “The China slowdown, due to tariff and trade concerns, is troubling and bears watching.”

Meanwhile, the U.S. economic expansion is nearing the longest in history. In fact, at 10 years old, this is the second longest expansion since 1900, according to J.P. Morgan.

“(U.S.) Growth accelerated meaningfully in 2018 on the back of fiscal stimulus and an improving trade deficit,” Dr. David Kelly, Chief Global Strategist for J.P.Morgan said in the 2018 fourth quarter Asset Management Market and Economic Update.

“Moving forward, however, growth should slow as trade numbers worsen, the effects of fiscal stimulus fade, and structural limitations become a drag," Kelly said.

As the U.S. opens up trade battles on multiple fronts including China, Europe, Turkey and Japan; business confidence and financial markets will be impacted, analysts warn.

"New NAFTA" Relief

“At the same time, prospects for the recently agreed upon “new NAFTA” are positive for the U.S., because Canada and Mexico are the number one and two destination for U.S. exports,” Chang said.

Bringing Canada into an agreement already embraced by Mexico and the U.S. in late August, negotiators agreed on the New NAFTA on September 30, 2018. The new trade deal is called the United States-Mexico-Canada Agreement (USMCA), refreshing the original agreement in place since 1994.

The American Chemistry Council (ACC) commended the negotiators from the U.S., Canada, and Mexico for agreeing to update a trade pact that has historically leveraged chemical manufacturing and the highly-integrated, North American supply chain to reduce costs, boost U.S. exports, and inject new growth and job-creation throughout the region.

“The pact appears to include several enhancements long sought-after by the U.S. chemical sector,” the ACC said in a statement.

The U.S. chemical sector has capitalized on duty-free trade under NAFTA ever since its inception, more than tripling U.S. chemicals exports to Canada and Mexico – from $13 billion in 1994, to $44 billion in 2018. Chemical exports are projected to grow to $59 billion by 2025, the ACC said.

The U.S. chemical industry is nearly dependent on trade. The majority of U.S. exports go to Canada, Mexico and China. And Mexico is almost 2/3 of the entire U.S. chemical trade surplus, according to data from the ACC.

Image: ICIS, Data: American Chemistry Council

“If NAFTA broke apart, we would see further tariff developments,” Chang said. “The new NAFTA provides relief that this healthy trade will continue with America's partners.”

US-China Trade War

With the third round of US-China tariffs now in effect, China finished plastics products and U.S. exports of commodity chemicals are beginning to see impacts. The rate goes even higher in January when the 10% U.S. tariffs on $200 billion in China imports rises to 25%.

The first round of 25% tariffs on $34 billion in China imports did not include any chemicals. The second round of 25% tariffs on $16 billion in China imports, which many trade associations did not think would go through, impacted $2 billion in U.S. chemicals and plastics exports, according to the ACC.

The third round, 10% tariffs on $200 billion in China imports, impacted another $8.8 billion in U.S. exports of these products, the ACC said.

“The big impact will be on China with its finished plastics exports to the U.S. – products such as vinyl flooring, pipes, plastic bags, films and containers,” Chang said.

As China finished plastics exports to the U.S. take a hit, it will likely reduce overall Chinese demand for polymer resins to create those finished goods, Chang explained.

So much polyethylene

U.S. exports to China of high density polyethylene (HDPE) and linear low density polyethylene (LLDPE) were around 500,000 tonnes, or less than 5% of total production in 2017, but U.S. PE exports to China were estimated to hit nearly 2 million tonnes by 2020 pre tariffs, Chang said.

“Looking at 2017 numbers, the percent of total US bulk chemical production actually impacted by China tariffs remains less than 7% for many chemicals. However, China has put tariffs on major grades of US polyethylene just when major capacity is starting up," Chang said.

Nearly 7 millions tonnes of additional polyethylene capacity are expected in North America from 2016 to 2019 as ‘first wave’ plants start up. Total polyethylene capacity could increase by another 5 million tonnes by 2022 as ‘second wave’ plants begin operations.

The shale gas advantage continues to drive petrochemical investment in the U.S.

The ACC estimates more than $200 billion in petrochemical capital investment has been built or announced since 2010. Around $105 billion of that are already finished or under construction.

Nine new crackers are expected to come online in the U.S. by 2020 representing 10.7 million tonnes/year of new ethylene capacity. 9.2 million tonnes of that will be online by the end of 2019 in the U.S. Gulf. An additional 1.4 million tonnes of ethylene is coming online as a result of cracker expansions for a total of 9.2 million tonnes of additional ethylene capacity in the U.S Gulf or 35% of existing US capacity by 2019, according to ICIS.

Most of the crackers being built are ‘cracker plus’ projects and the plus is usually a polyethylene plant.

The U.S. will add 6.5 million tonnes/year of polyethylene capacity through 2019 or roughly 39% of US capacity, based on ICIS data.

That number nearly doubles by 2022 with 12.1 million tonnes of capacity added assuming plants are built. This is 74% of total US capacity, according to ICIS.

“Of the new plants coming online, polyethylene is mostly for export. The U.S. polyethylene market is well supplied and the market is only growing at U.S. GDP levels,” Chang said. “With tariffs in place, we may see companies thinking twice about these large investments.”

Less capacity additions elsewhere in China and the Middle East through 2020 will help the U.S. scenario for a little while. But a big wave of new investment in China, the Middle East and India comes around 2025, Chang said.

By Heather Doyle