Singapore — The Trump administration's planned tariffs on steel and aluminum have sparked concerns of a trade war and rattled commodity markets, even though the trades themselves are relatively small. Imports of steel and aluminum together account for only about 2% of total US goods imports, and even lesser comes from China.
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But the spotlight has clearly fallen on US-China commodity trade flows for several reasons.
Trump has tweeted about possible exemptions for Canada and Mexico, the most impacted countries, if they comply on the North American Free Trade Agreement.
The underlying reports by the US Department of Commerce's Bureau of Industry and Security, Office of Technology Evaluation, in January 2018 repeatedly blame Chinese overproduction for weakening the US economy.
Trump's announcement last week was preceded by tariffs in January on imports of washing machines and solar panels into the US. China responded with an investigation into imports of sorghum from the US, and threatened to replace US soybean and cotton imports.
America's record $375 billion trade deficit with China is not because of raw materials, but because of the finished goods it imports from China, from shoes to electronics.
As far as pure play commodities are concerned, China likely has the leverage as the fastest-growing market for US crude oil, LNG, propane and agricultural products, which is why any trade war risks are spilling over to the commodities space.
Below, S&P Global Platts looks at the commodities trade flow between the US and China and what is at risk.
METALS - STEEL
* The US Department of Commerce report on steel states the US is the world's largest steel importer and imports continue to rise. Total US imports of steel products peaked at 40.2 million mt in 2014 at the height of the shale boom, rising from 25.9 million mt in 2011. The US is expected to hit 36 million mt of imports in 2017.
* Canada is the single largest supplier to the US by volume, accounting for 16.14% of imports in 2017, with a volume of 5.8 million mt. This is followed by Brazil, South Korea, Mexico, Russia, Turkey, Japan, Germany, Taiwan and India in the top 10.
* At number 11, China accounted for just 2.2% of total US steel imports by volume in 2017 at 784,393 mt.
* But this volume was only 1.4% of China's total exports at 74.82 million mt, according to Wood Mackenzie. "Thus, the steel tariffs will not have much impact on Chinese steel exports and China does not have as much to lose as the traditional US trading partners," it said.
* The DOC blames China for global overcapacity, saying "free markets globally are adversely affected by substantial chronic global excess steel production led by China." It says US steel production capacity has remained flat since 2001, but other nations have increased theirs, with China alone able to produce as much steel as the rest of the world combined. Chinese excess capacity, estimated at more than 300 million mt, dwarfs the US.
* While more details may be available this week, market participants have told S&P Global Platts that the measures are likely to be differentiated by country and product. The DOC recommendations allow for exemptions "based on an overriding economic or security interest of the United States."
* US hot-rolled steel coil prices neared a seven-year high, and hit a level seen only four times in the market since 2000, on March 1, in reaction to the news. The daily Platts TSI US hot-rolled coil assessment rose to $800/st and remained at that level early this week. HRC prices were last above $800/st in May 2011.
METALS - ALUMINUM
* US imports of aluminum products identified by the DOC report totaled 5.9 million mt in 2016, up 34% from 4.4 million mt in 2013. In the first 10 months of 2017, aluminum imports rose 18% above the 2016 level.
* Like steel, Canada is also the largest supplier of aluminum to the US, accounting for 43% of total imports by both value and weight in 2016, at about 2.6 million mt/year. Canada is followed by Russia, the UAE, China and Bahrain in the top five suppliers.
* China accounted for nearly 10% of US aluminum imports in the first 10 months of 2017 at around 547,127 mt over January-October 2017.
* The DOC said imports from Canada have been consistent over the four-year period, but imports from China increased 75% by volume between 2013 and 2015. Imports from China in all aluminum categories are up by about 33% by value and 25% by weight for the first 10 months of 2017 compared with the same period last year. * The DOC blamed foreign government subsidies, particularly China's, for causing global aluminum production overcapacity, and impacting the US aluminum industry.
* "A major cause of the recent decline in the US aluminum industry is the rapid increase in production in China. Chinese overproduction suppressed global aluminum prices and flooded into world markets," it said.
* China's aluminum production is largely unresponsive to market forces. China produced around 1 million mt of excess supply in 2016, exceeding the total US 2016 production of primary aluminum of 840,000 mt, the DOC said.
* Consequently, US annual primary aluminum production halved in 2016 on year, and declined further in 2017. Since 2012, six smelters with a combined 3,500 workers have been permanently shut down, and jobs fell 58% to 5,000 employees from 13,000 between 2013 and 2016.
* The proposed tariffs should allow domestic producers to increase their production by 669,000 mt to 1.45 million mt, according to the DOC.
* The Platts aluminum P1020 US Midwest Transaction premium rose to 16.5 cents/lb on March 2, up 2 cents in the last two weeks and near a three-year high on the tariff news.
* Shanghai Futures Exchange's aluminum futures prices fell last Friday. The most active 1804 aluminum futures contract closed at Yuan 14,340/mt ($2,251/mt) Friday, down from Yuan 14,390/mt Thursday, SHFE data showed.
China is the fastest-growing buyer of US hydrocarbons including crude oil, natural gas, propane and other petroleum products. An escalation of the US-China trade war threatens this growing East-West commodity trade and puts US dependency on Chinese markets at risk.
* Restrictions on US crude exports were lifted in December 2015, after which US crude exports rose to an average of 591,000 b/d in 2016 and nearly doubled to 1.1 million b/d in 2017, according to the US Energy Information Administration. In October 2017, US crude exports touched a monthly high of 1.73 million b/d.
* Canada is the largest buyer of US crude but its share has declined to 29% in 2017, from 60% in 2016 and 92% in 2015, as growing seaborne exports have outpaced pipeline exports.
* The fastest growth has been in China, which went from nearly zero imports of US crude to becoming the second-largest destination of US crude after Canada, with 20% of total US crude exports at 220,000 b/d in 2017, EIA data showed.
* However, for China, US crude constituted less than 2% of its total crude mix in 2017 at 7.65 million mt, averaging 153,709 b/d, according to the General Administration of Customs. (Official data can differ due to the amount of time it takes for a cargo to be shipped from the US to China).
* Still US-China flows continue to grow. China's crude imports from the US hit a new record high at 2.01 million mt or 474,450 b/d in January, General Administration of Customs data showed.
* Unipec, the trading arm of Asia's largest refiner Sinopec, said it would raise its shipments from the US to China by around 80% to 10 million mt in 2018, from 5.57 million mt last year.
* US crude exporters are reconfiguring export facilities on the US Gulf Coast to load larger ships, like VLCCs, to enable economies of scale for exports to Asia. The Shaden, the first VLCC to directly load a crude cargo at the Louisiana Offshore Oil Port, departed the terminal February 18 carrying US crude to China, Platts trade flow software cFlow showed.
Like crude, China has rapidly become one of the top buyers of US LNG, but the journey has been tumultuous.
* US LNG exports to China jumped to 103 Bcf in 2017 from 17.2 Bcf in 2016, according to the Energy Information Administration.
* China accounted for nearly 15% of US LNG exports in 2017, behind only Mexico and South Korea, according to the EIA.
* S&P Global Platts analytics estimates that China accounted for 21.5% of US LNG exports in 2018 year to date. This puts China on track to potentially become the largest buyer of US LNG this year.
* US supply accounted for 4.2% of China's total LNG imports in 2017, up from 0.8% in 2016, according to Platts analytics. US LNG accounted for 9.2% of Chinese imports so far this year.
* China surpassed South Korea to become the world's second-largest LNG importer in 2017. China's imports grew 46% on the year in 2017 at 37.8 million mt, and are expected to reach nearly 49 million mt in 2018, Platts data showed.
* China's total regasification capacity is also set to increase from 70.7 million mt/year in 2017 to nearly 80 million mt/year in 2018 due to the startup of new terminals and expansion of existing ones, Platts reported.
* In February 2018, Cheniere Energy said it finalized two long-term supply deals with state-owned China National Petroleum Corp. following the signing of a memorandum of understanding in November for 1.2 million mt/year of LNG. The deal supports the development of Train 3 at Cheniere's Corpus Christi facility that is currently under construction.
* In November 2017, the US and China had also signed preliminary agreements for LNG exports from the Delfin floating liquefaction project, which is the first US floating LNG export facility.
* During Trump's China visit, Sinopec, CIC Capital Corporation, Bank of China, Alaska Gasline Development Corporation, and the state of Alaska agreed to develop the $40 billion, 20 million mt/year Alaska LNG project comprising three liquefaction trains at Nikiski in south central Alaska, an 800 mile gas pipeline, a gas treatment plant on the North Slope; and various interconnecting facilities to link the Prudhoe Bay gas complex to the treatment plant.
* In May 2017, the White House announced a 10-point trade plan between Washington and Beijing.
China is expected to be the most important market for US exports of agricultural, forest, and fishery products followed by Canada and Mexico.
* Total US agricultural exports in fiscal 2018 are forecast at $139.5 billion, of which exports to China are projected at $21.6 billion, according to the US Department of Agriculture. China will account for around 15.5% of total US agriculture exports in 2018.
* US agriculture exports to China have slowed due to tighter controls by Beijing as well as trade agreements. Future flows could be further constrained by preference for Belt & Road Initiative countries.
* Soybean exports to China are expected to be worth $22 billion in 2018, around 15.7% of total US exports.
* Soybean exports averaged 50% of total US agriculture and related product exports to China over the last 5-year period. In 2016, China imports accounted for 62% of US soybean exports, and 79% of US sorghum exports, according to US data.
* The US is the second-largest supplier of soybean to China, after Brazil. China bought about 35 million mt of soybeans from the US, representing 37% of its total imports for the 2016-2017 marketing year, according to data from the US Department of Agriculture.
* The US is the third-largest exporter of wheat after Russia and the European Union, accounting for 14% of global exports in 2017-2018. In the first 41 weeks of 2017, China was the fourth-largest destination for US wheat exports at 7% of the total, after Mexico, Japan, and the Philippines, according to Bancosta Research.
* US propane or LPG has emerged as one of the fastest-growing hydrocarbon exports, with billions of dollars being invested in export facilities on the East Coast by companies such as Sunoco Logistics, Enterprise Product Partners, Kinder Morgan, Phillips 66, and Occidental Petroleum.
* US propane exports to Asia have grown with record movement of VLGCs, accelerated by the expansion of the Panama Canal.
* For 2018, US LPG production growth has been forecast at 7%, and seaborne exports projected to grow by 7.5%, according to BW LPG, one of the largest VLGC operators. China and India were the main markets, posting import growth of 15.4% and 35.1% respectively in 2017.
* China was the second-largest destination of US LPG exports in 2017, while the US was also the second-largest supplier to China.
* Until 2016, US LPG exports to China exceeded crude oil exports. DNB Markets Shipping research indicates that nearly 100% of US export growth has headed to Asia in 2017 and in 2018 this will amount to around 86%.
* Other key US petroleum product exports to China are fuel oil, mixed aromatics and naphtha.
* China bought 6.5 million mt of US thermal coal, coking coal and petcoke in 2017, up from 3.5 million mt the year before, mainly driven by an increase in coking coal due to supply disruptions in Australia, according to Platts analytics.