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US petrochemicals industry alarmed at potential China tariffs

Houston — China's plan to impose 25% tariffs on 106 US products, in response toPresident Donald Trump's proposed import taxes on $50 billion in Chinesegoods, includes several petrochemical products for which the Asian country isa critical export market, prompting a swift response from the industry's tradegroup.

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"China is one of the US chemical industry's most important tradingpartners, importing 11 percent, or $3.2 billion, of all U.S. plastic resins in2017," American Chemistry Council CEO Cal Dooley said in a statement afterChina's tariff plan was disclosed Wednesday. "We are particularly concernedthat 40 percent of the products to which China has assigned new tariffs arechemicals, including polyethylene, PVC, polycarbonates, acrylates, andothers."

US tariffs on Chinese goods cannot take effect until May, after publiccomment periods. China did not specify when its tariffs may take effect.

ACC represents major chemical manufacturers, including DowDuPont,ExxonMobil Chemical, Chevron Phillips Chemical, Huntsman and LyondellBasell.Those companies did not respond to requests for comment, leaving ACC to speakfor them.

However, many have new plants among the nearly $185 billion in newchemical infrastructure, expansions and facility restarts in the US -- largelyconcentrated along the US Gulf Coast -- that will make some of the productsfacing new tariffs.

The US natural gas shale boom unlocked vast deposits of ethane, the cheapfeedstock of choice for eight new steam crackers starting up in the US from2017 to 2019, which will feed ethylene to 14 new polyethylene plants startingup in the same span. A second wave of crackers and derivative plants,including PE, are slated to come online post-2020.

The overall impact of the tariffs would be higher global polyethyleneprices, according to S&P Global Platts Analytics. The US and Middle East arethe main global suppliers to PE short markets like Asia, so any tariff wouldraise prices -- the issue would be which region supplies China.

Of 6.36 million mt/year of new polyethylene capacity coming online from2017-2019, 45% will make linear-low density polyethylene, and 12% willmake low density polyethylene. Both grades are used to make film, likeshrink wrap, while LDPE also can be used for stronger thicker plasticcontainers like detergent bottles.

UNCLEAR IF LLDPE INCLUDED

China's list of targeted products specifically includes LDPE. Marketsources, including the ACC, were working to determine whether LLDPE also wasincluded, as its chemical makeup is very similar to LDPE and in line with withspecifications on China's list. However the trade code specified was only forLDPE resin.

The initial wave of US Gulf Coast polyethylene units in 2017 did notinclude new LDPE capacity, but several projects slated to start up next yearwill, according to Platts Analytics and company announcements.

Formosa Plastics USA is building a 625,000 mt/year LDPE plant in PointComfort, Texas, giving the company its entrance to the market after previouslyproducing high-density polyethylene and LLDPE grades.

Sasol, which opened a joint HDPE plant with Ineos in 2017 along theHouston Ship Channel, is working to bring its Lake Charles, Louisiana, complexonline, which will include 450,000 mt/year of LDPE capacity in late 2018 orearly 2019, according to market sources.

DowDuPont also is set to bring 350,000 mt/year of new LDPE capacityonline at its Freeport, Texas, complex this spring.

Most, if not all, of the new US polyethylene output will be exported, asNorth America is already oversupplied. Last year, the US and Canada exported15% of the region's polyethylene output, or 3.47 million mt.

China received 12% of those exports in 2017, the third-largest recipientbehind Mexico and Canada, according to US International Trade Commission data.

"Without China, I just don't see where all this goes," a US-based polymertrader said, noting that regions like Latin America and Africa -- whilegrowing markets -- do not have anywhere near China's buying power.

PACKAGERS HAD ALSO HIKED CAPACITY WITH AN EYE TO CHINA US resin packaging companies also added more than enough capacity topackage that new resin in 55 lb bags for export, banking on demand from Chinaand other major markets.

"This is highly disconcerting," said Marc Levine, CEO of Plantgistix, oneof many packagers that added capacity at warehouses near the Houston ShipChannel.

"If US resin becomes 25% more costly in China, certainly this would havea significant negative impact on US contract packagers, includingPlantgistix," he said. "Most of us primarily package plastic resin for export.We handle LDPE and LLDPE, and China by far has been our largest market."

The ACC's Dooley said the new and expanded infrastructure was predicatedon current tariff schedules, and market shifts caused by tariff increases mayconvince investors to do business elsewhere.

"We strongly urge the US and China to reach a productive and meaningfulagreement before any of the proposed tariff schedules go into effect," hesaid.

China's tariff targets also include polyvinyl chloride, which is usedheavily in construction to make pipes, window frames and vinyl siding, andethylene dichloride, which is a precursor to PVC.

PVC, EDC FACE DIFFERENT FORTUNES

The US exported 31% of its PVC capacity in 2017. Of that, 11% went toChina, the second-largest recipient behind Canada. Antidumping duties alreadyprevent US PVC from entering China's domestic market, so that product isre-exported into Southeast Asia, a US producer source said.

"That is all re-export business, so there's no effect" from potentialtariffs, the source said.

However, EDC would be affected. China is by far the largest recipient ofUS EDC exports, having taken 27% of 1.3 million mt in 2017, according to UStrade data. China received 25% less last year compared with 2016 becauseproducers there are making more EDC domestically, using chlorine output fromchlor-alkali plants run at high rates to capture strong caustic soda margins.

Another target on China's list is acrylonitrile, used to make syntheticfibers like nylon as well as synthetic rubber. The US exported 332,251 mt ofACN to China in 2017, 59.4% less than in 2016. China was the sixth-largestmarket for US ACN last year, behind South Korea, Mexico, Taiwan, Turkey andPeru, according to US trade data.

"This will definitely have an impact on ACN, especially right afterimplementation," a market source said Wednesday. "I would expect that withtime, the export destinations will shift around as someone else supplies Chinaand we move to a different country. The LDPE is big news, too, as we increaseUS PE production and needed exports to keep the market balanced."

--Kristen Hays, kristen.hays@spglobal.com

--Chris Ferrell, christopher.ferrell@spglobal.com

--Nida Qureshi, nida.qureshi@spglobal.com

--Edited by Lisa Miller, lisa.miller@spglobal.com