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Analysis: China's purchases of US commodities lay groundwork for trade deal

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Analysis: China's purchases of US commodities lay groundwork for trade deal

Highlights

Purchases seen as 'peace offering' ahead of summit

US crude oil, soybeans see greatest Chinese trade interest

LNG and minerals still lukewarm despite inquiries

Singapore — Increased Chinese purchases of select US commodities like crude oil and soybeans are seen as a positive sign in the run-up to the trade summit between the two countries -- a date for which has not yet been decided -- although market participants remain cautious about whether trade flows will be sustained.

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Higher trading volumes are significant because they lay the groundwork before the talks and are seen as a sign of goodwill, especially since this was one of the key points in preliminary discussions between Beijing and Washington in February.

The increase in purchases is most evident in crude oil and soybeans, but less so for other commodities like liquefied natural gas and minerals, although traders have been reporting a spike in inquiries from China across the board.

"China has restarted importing US products, not only soybean, but also crude oil [although] 'not big' volumes," a Shanghai-based trader said.

The trader, who supplies US crude to Chinese buyers, said raising imports is easier to do than meeting other US demands for market reforms, intellectual property rights and curbs on technology transfers.

CRUDE OIL

State-run oil company Sinopec has bought US crude oil after a lull of several months, after its refineries were asked to submit purchase orders in February, Platts reported earlier.

Sinopec's 9.2 million mt/year Hainan and 5 million mt/year Dongxing refineries in southern China have scheduled a VLCC for loading by the end of March, with arrival in China in late May. Its 8 million mt/year Anqing and 8 million mt/year Wuhan refineries in central China have also bought US crude for arrival over May-June.

"China is keeping to its end of the bargain buying US crude. But it probably also needs to diversify its crude sources amid supply risks elsewhere (OPEC cuts, Iran, Venezuela)," S&P Global Platts senior China analyst Grace Lee said.

Lee however said buying more US crude may not go that far towards solving the fundamental issues between the two countries, which run deeper.

Chinese refiners are also welcoming alternative crude sources as light sour Middle East crudes like Murban, which is priced off Dubai, are looking quite expensive relative to US crudes. US crude benchmark WTI is almost $10/b cheaper than the Dubai crude benchmark, making the arbitrage from the US attractive.

There has also been reduced buying of other Dubai-priced crudes from China, such as ESPO and Oman, both long time Chinese favorites.

LNG

US LNG exporter Cheniere Energy is in talks with Sinopec about a long-term LNG supply agreement and the parties are awaiting government clearances. The deal has been in the works for some time but likely stalled because of the trade war.

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"I think Chinese investment in US projects has definitely been affected. I don't know of any direct Chinese investment in a US project," Vivek Chandra, chief executive of Texas LNG, said in a recent interview, adding that LNG trade will be one of the first things that gets resolved if talks succeed.

The deal would add to Cheniere's two existing long-term contracts with state-run China National Petroleum Corp (CNPC) that were signed in February 2018, with a portion of the supply beginning in 2018 and the balance in 2023.

Chinese traders have been swapping out their US LNG cargoes for non-US cargoes for nearly five months and little US LNG has made its way to China because of the 10% tariff and weak Northeast Asian spot markets.

SOYBEANS, LPG AND COAL

Sinograin, the state-owned company that controls China's grain reserves, has been inquiring about US-origin soybeans since early March, according to traders.

China promised to buy 10 million mt of US soybeans from the US following trade negotiations in February. Up to last week, state companies had purchased around 2 million mt, one fifth of the committed volumes, and buying activity remains very slow, traders said.

"They bought at a 20 cents/bushel ($7/mt) premium compared to the price of Brazil-origin soybeans," said one trader.

Other key commodities for US-China trade are LPG and metallurgical coal, but the response in these sectors has been lukewarm.

Metallurgical coal traders said they were testing the market and a top buyer of US coal said Chinese traders had made inquiries but were not keen.

Meanwhile, Chinese propane dehydrogenation (PDH) plants, which import US LPG on VLGCs, have not been asked ramp up US imports so far, although some of them are state-owned, sources said.

China currently imposes a hefty 25% tariff on US LPG imports and some PDH plants have already switched to long-term contract with Middle East suppliers. If the tariffs are lifted, US imports will be dependent on competitiveness versus Middle Eastern barrels, a source with China Gas said.

Chinese PDH plant operator Wanhua Chemical signed a 10-year FOB term contract with the UAE's ADNOC to import 1 million mt/year of LPG. China's Oriental Energy has also signed a five-year term contract with Qatar Petroleum for 600,000 mt/year of LPG from January.

A new PDH plant Fujian Meide, which had a contract for US propane, is scheduled to go on stream in the third quarter. It could push up imports US imports if the trade war ends.

-- Analysis by Eric Yep, eric.yep@spglobal.com; Oceana Zhou, oceana.zhou@spglobal.com; Cindy Liang, cindy.liang@spglobal.com; Eesha Muneeb, eesha.muneeb@spglobal.com; Ivy Li, ivy.li@spglobal.com; Yi-Le Weng, newsdesk@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com