Variable cost margins for us PE producers remain high, but we should not be looking at current high profits, nor should we assume that they will be able to absorb 25 per cent of tariff costs and export them to China.
Some American PE firms have promised shareholders a profit before imposing a 25 per cent import tariff to cover the huge cost of capital they will have to repay for new investment. That could mean U.S. producers will have to try to pass on some or all of the 25% tariff costs to Chinese customers. If the renminbi's sharp depreciation against the dollar this year continues, Chinese customers may be reluctant to buy American goods with additional tariffs. Even without additional tariffs, the yuan's depreciation against the dollar has increased the cost of imports for Chinese PE buyers.
Assume that all of these ideas are wrong. What if trade friction between China and the United States intensifies and Chinese buyers stop buying American goods for patriotic reasons?
Patriotism could lead to a sharp fall in us exports of LDPE to China. LDPE was originally included in China's list of tariffs, but was later dropped.
At the same time, China is well-placed to avoid buying American goods. China's PE production rose 6.6 percent year-on-year in the first half of 2018, while imports increased 23.3 percent. Domestic demand is strong, digesting most of the growth. A ban on waste plastics imports in January boosted demand for fresh raw materials.
But anheuser-busch data showed inventory growth.
Global PE market shuffle
All alternative markets are smaller than China's, and many are much smaller. Do these markets have enough room to absorb us PE exports without seriously harming local oil PE suppliers? Can these suppliers respond by lobbying the government to successfully implement trade protection measures?
Non-metallocene/metallocene C6 (1-hexene) and C8 (1-octene) LLDPE are important components of U.S. production plans, and can these small markets guarantee that there are sophisticated enough devices to process these products? If not, do U.S. full-density devices have to switch to larger but less value-added C4 (1-butylene) LLDPE and commodity HDPE? What impact will this have on earnings?
We must also consider the impact of the Turkish crisis on global PE demand. Before the crisis, we had forecast that Turkey's PE net imports would rise to 1.7 million tonnes and 1.8 million tonnes in 2018 and 2019, respectively, from about 1.6 million tonnes in 2017. Now we may have to lower our expectations. Transit shipments from Turkey will have to find a foothold elsewhere.
Smaller markets have another problem. Because of the small capacity of these markets, the cost of shipping PE per ton in containers may be higher than the cost of shipping to China. What about the return voyage? Do these small markets have enough finished products to fill container ships and return to the United States? If not, further increases in shipping costs are possible.
Next comes the question of developing more export markets. Do U.S. companies have a large sales and marketing team that can quickly boost sales in small markets with diverse cultures, customs regulations, and economic needs?
Does that mean U.S. producers will have to process more goods through traders? That could further erode the profits of American PE producers.
The recession spread
What broader economic impact will sino-us trade friction have? Oxford Economics predicts that trade friction could lead to a decline in China's GDP growth rate to 6.4 percent this year, down from 6.9 percent in real terms in 2017.
Growth of 6.4 percent remains high compared with other countries and regions. But even if the ban on waste plastics boosts China's PE demand, will this level of growth reduce China's overall PE imports in the second half of 2018 and 2019? That would mean more oversupply pressure in other markets outside China.
In addition, the United States has imposed import tariffs on Chinese plastic products. In 2017, the United States imported $16.3 billion of plastic products under the same tax code from China - which doesn't cover all plastic imports from China. That makes China the largest source of imports to the United States, while Canada's $11 billion export to the United States ranks second.
If the imposition of tariffs on us plastic products continues, we have reason to believe that China's PE imports will fall in the second half of 2018 and 2019. China usually imports PE resin into plastic products and then exports them.
It must then take into account the impact on China's economy of import tariffs imposed by the us on a large number of other finished goods.
There is also downward pressure on the economy from Beijing's efforts to clean up bad debts and clean up pollution -- both of which are bad for short-term growth. China is likely to slow down slightly in its efforts to clean up bad debts. But the amount of credit in 2018 is likely to be much lower than in 2017. Environmental issues are politically and economically important, and governance will not be reduced.
China is a long way from becoming an economic island. It is inextricably linked to the economic fortunes of other developing countries, where PE demand growth is bound to suffer if China slows.
In addition, the growth of PE demand in developed countries, including big exporters like Germany, which rely heavily on exports to China, will also be affected.
One might criticize all of these ideas. If corporate America has a plan in place to meet these challenges -- or if Mr Anth misinterpreted them -- Mr Anth is here to apologise in advance.
But the premise of criticism should not be: "don't worry -- both sides will reach an agreement and there is no need to plan for such a bad outcome. The trade friction will end in a few months.
Instead, PE and other petrochemical and polymer companies must assume the trade friction will be protracted, simulate its impact on business and develop mitigation programmes.
Everyone wants trade frictions to end as soon as possible, but businesses must be prepared for them to continue.