JLC Special on China-US Trade War: Chemical Industry Stay Calm

May 24, 2018

China and US issued a joint statement on bilateral economic and trade consultations in Washington. The two sides reached a consensus in six respects including taking effective measures to substantially reduce the trade deficit between US and China, and ended this round of “constructive consultations”. The China – US joint statement contains consensus on agricultural products, energy, manufacturing products, service trade, intellectual property protection, and two – way investment. How will it affect the chemical industry? Here we selected representative products in chemical industry to analyze briefly.

First of all, let’s look at the styrene market whose import trading was active. On the one hand, China-US trade friction mitigation will reduce styrene market insiders’ concerns about external risks. After the significant progress in China-US trade negotiations, the external risk that market insiders eyed on was avoided. Although the economic trend was still uncertain, considering that the easing of the trade war contributed to the improvement of risk appetite, China’s domestic stock market and commodity futures market might rebounding the short term.

On the other hand, with the dissipating of trade war concerns, China agreed to take effective measures to substantially reduce the trade deficit between US and China, which would contribute to US’s economic growth. Coupled with recent Fed Chairman Powell’s speech, which always favor hawks, dollar is highly likely to further strengthen. In this context, the import cost of styrene importers will further increase, which will effectively support the market price.

In addition, from historical data, Sinopec’s import of US crude oil accounted for about 10% of the total US crude oil exports for the year, making it the largest US crude oil trader in the Asia Pacific region. The China-US trade negotiations agreed to increase US energy exports. Therefore, Sinopec’s imports of US crude oil was expected to maintain rapid growth in 2018, and the total import volume is expected to exceed 10 million mt. Under this circumstance, the production cost of benzene may drop to a certain extent.

Comprehensively, the advantages of trade negotiations outweighed the disadvantages on the influence of styrene.

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Styrene market bullishness would be further boosted amid strong simulative atmosphere, positive fundamentals and external good news, which would effectively support styrene market price in the short term.

From the perspective of the aromatic products’ arbitrage activities in Asia and US, affected by the phased relaxation of China-US trade war, systemic risks in the short-term aromatics market reduced, which promoted the market sentiment. With the improvement of market sentiment, futures market of agricultural product and energy products increased rapidly today.

From the perspective of toluene and xylene arbitrage activities in Asia and US, the Asia-US arbitrage window is basically closed for most of the time. US mostly relied on the import from Europe to fill its demand gap. Therefore, the China-US trade war mitigation would have limited influence on toluene and xylene markets.

However, on the other hand, the phased relaxation of China-US trade war would lead to the entrance of cash, which will in turn affect the stock market and the futures market. Under the influence of range-bound commodity futures, toluene and xylene market prices would go range-bound affected by speculation. Especially,recent market supply was tight due to the shortage of import and petrochemical enterprises’ production cut, which also created good condition for market speculation. And market negotiations would be enhanced then.

From the perspective of methanol products, presently there were limited substantive methanol transactions between China and US. Although imported US-origin methanol increased in 2017, the overall import volume was still limited in 2017 and the first quarter of 2018.U.S. methanol market will exert more influence on China methanol market from 2020, due to the release of production capacity in this region. However, it should be noted that in the statement, both sides agreed to increase US energy exports, including ethane, natural gas and other products, which will indirectly affect China’s methanol market. On the one hand, importing natural gas may reduce the cost of domestic natural gas, and then improve the cost competitiveness of natural gas-based methanol in China. On the other hand, the imported ethane might increase the demand of domestic ethane cracking, which in turn will be detrimental to domestic MTO industry due to higher MTO cost. However, it should be noted that there is stilla certain period of time between China-US consultations and energy import.

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Therefore, the statement would mainly affect the long-term market and was expected to have little influence on China methanol market in short and medium term.

On the whole, although China-UStrade war has eased, the future market will still face great uncertainty in terms of policy, such as the trade dispute between Europe and US. The minutes of FED and ECB meetings will also be announced.

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A new round of negotiations is about to begin. Market liquidity may face challenges in June. We will continue to eye on the follow-up impact on the market.