Trade battle could hurt plastic exports to China
50% DECLINE: Asian powerhouses to find other sources if tariffs stay
U.S. plastics shipments to China are expected to slide next year amid an escalating trade battle between the two countries that could curtail export opportunities for Gulf Coast petrochemicals producers banking on Asian demand growth.
A recent report by research firm Wood Mackenzie expects U.S. exports of plastic resins used to make packaging, consumer goods and other products to fall by as much as 50 percent next year if recently imposed tariffs remain in place. The firm expects the Asian powerhouse to instead import those volumes from the Middle East, South Korea, Thailand and Singapore, eating into profit margins for U.S. exporters shipping to China.
The prediction comes after China in August levied a 25 percent tariff on many American chemical products after the Trump administration expanded the number of Chinese imports subject to tariffs. The list now includes several grades of polyethylene — the world’s most common plastic — as well as other resins and petrochemicals accounting for nearly $11 billion in Chinese imports.
The trade battle has escalated as petrochemicals producers along the U.S. Gulf Coast pour billions of dollars into new plants and expansion projects to capitalize on low-cost natural gas feedstocks from West Texas and elsewhere. Many companies are building with an eye toward China and emerging markets in Asia where population growth is expected to drive demand in the coming years.
Analysts say that in the near term, the tariffs should have limited impact on U.S. exports of polyethylene and other base plas-
tics because only a portion of them are destined for China. Exporters are already rerouting shipments to other markets.
Jonas Oxgaard, a chemicals analyst with New York investment and research firm Sanford C. Bernstein & Co., noted earlier this year that China accounted for an estimated 11 percent of U.S. polyethylene exports in 2017. He said in an interview that Latin America, Europe and Asian countries, including India, could import a larger amount of plastic resins as domestic production ramps up.
“Even with other plants coming online, we don’t need China to take it,” he said. “We can find a home for it in other markets.”
Analysts anticipate the tariffs could have a larger impact in the coming years as companies decide if and when to expand petrochemicals operations in the U.S. The American Chemistry Council, a trade group, estimated that chemicals industry has already invested more than $200 billion in 333 new projects across the U.S, many of which are along the Gulf Coast.
Many companies are building with the expectation that China will continue to drive long-term demand growth. The Wood Mackenzie report noted that China, which lacks the production capacity to meet its domestic demand, is fastest-growing market for American plastic resins.
In a recent interview, Lyondell-Basell CEO Bob Patel said that he expects tariffs could influence a near-term shift in trade flows with minimal impact on operations. But he noted the trade dispute could have longer-term effects on Gulf Coast investment decisions if tariffs remain in place.
His company is investing heavily to expand along the Gulf Coast. It began construction last year on a $725 million plant to produce polyethylene at its La Porte complex, and this year, it started work on a $2.4 billion plant in Channelview to produce chemicals used in either polyurethane foam or high-octane gasoline.
“If we’re building for exports, and the drive for global demand is coming from China, we would consider whether this is the right place to build the next plant,” Patel said. “We would want to factor in the impact of tariffs and how that impacts returns.”