The trade war between the US and China escalated on Saturday with China threatening an additional 25% tariff on $50 billion worth of US goods, including energy and agricultural products, in response to President Donald Trump's decision to place similar tariffs on the same annual value of Chinese product imports.
Analysis: Trade wars put the squeeze on commodity trading houses
News: Unipec faces uncertainty as Beijing threatens 25% tariff on US crude imports
Among the $50 billion worth of US goods, the additional tariff on a total $34 billion worth of US agricultural products, cars and marine products are due to come into effect on July 6, according to an announcement by the Customs Tariff Commission of the State Council.
Additional duties on the remaining $16 billion of US goods, including crude oil, LPG, gasoline, naphtha, fuel oil and natural gas, will be announced at a later date.
But LNG, demand for which is rising in China, was not on the list. The latest tariff threat between the two biggest economies comes less than a month after Beijing and Washington on May 19 inked an agreement to put the brakes on their trade dispute after China agreed to buy more US goods, key among them being LNG and crude oil.
US tariffs and China's retaliatory rhetoric have emerged as a big risk for commodity demand and prices in 2018, alongside a slowdown in the Chinese economy and geopolitical uncertainty.
In this Factbox, S&P Global Platts takes a look at the existing energy and agricultural trade between the two nations and the impact of the tariff threat.
- Crude oil is expected to see the biggest impact as Chinese buyers, both state-owned and private, have been ramping up US crude imports given competitive pricing and improving logistics.
- China's crude oil imports are exempt from tariffs currently.
- China has been the largest Asian buyer of US crude. China's crude imports from the US in Q1 rose to 3.89 million mt, or 316,770 b/d, from 443,000 mt a year earlier, and its market share rose to 3.5% from 0.4% over the same period.
- China accounted for 23% of total US crude exports of 1.67 million b/d in March, according to data from the Energy Information Administration.
- China's crude oil bill from the US was the largest among all energy commodities at $1.98 billion in Q1.
- Most of China's current crude imports from the US are medium sour grades such as Mars and Southern Green Canyon. But light sweet crudes such as WTI, Bryan Mound Sour, and even shale oil from Eagle Ford have joined the flow.
- Chinese state-owned trading company Unipec will be the hardest hit should Beijing impose a 25% tariff. The company has bought 16 million barrels of US crude for June loading. The barrels are expected to arrive in China over July-August.
- S&P Global Platts calculations show WTI averaged a $1.83/b discount to North Sea Forties on a delivered basis into China in May, and a 74 cents/b discount to ADNOC's Murban, indicating the competitiveness of US crude for China.
- LPG is expected to face the second biggest impact as US supplies accounted for 22.4% of China's total propane imports and 6.4% of butane imports in Q1.
- Propane was the only energy commodity in Beijing's first tariff threat list to the US on April 6. Trading sources had said then that they expected Middle East LPG to replace US supply once the additional tariff was implemented.
- Propane and butane currently carry an import tariff of 1%.
- China does not regulate the import of propane and butane, hence most importers are independent companies with terminals in the south and east. Imported LPG is used for cooking, industrial burning and as feedstock in petrochemical plants, including propane dehydrogenation units.
- Oriental Energy, which runs two PDH plants with a total propane processing capacity of around 1.5 million mt/year in eastern China, is the biggest importer of US propane. The company typically buys about two VLGCs of propane every month from the US.
- Yantai Wanhua, another major PDH plant in the eastern Shandong province, also has a term contract for US propane, which would amount to around 220,000-260,000 mt in 2018.
NAPHTHA AND FUEL OIL
GASOLINE, GASOIL AND JET FUEL
- China is an occasional importer of US naphtha. In Q1, US was the fifth-largest naphtha supplier to China with shipments of 75,294 mt. The volume accounted for only 4.5% of China's total imports in the period, according to data from the General Administration of Customs.
- Fuel oil currently carries an import tariff of 1%, but naphtha is exempt from duties.
- Beijing regulates naphtha imports and only state-owned oil companies and a handful of independent ones are allowed to crack imported naphtha.
- The US has not been a typical fuel oil supplier to China, but US straight-run fuel oil has recently attracted the interest of Chinese independent refiners because of its competitive pricing.
- China is self-sufficient in these oil products so the imposition of additional tariffs will have no impact.
- Gasoline and gasoil carry an import tariff of 1%, but jet fuel is exempt from tariffs.
- Among the three oil products, only gasoil was imported from the US in Q1 at 61 mt, customs data showed. The small volume suggests that the fuel was bunkered in the US as marine diesel by China-flagged vessels for their voyage back home.
- Meanwhile, China exported 441,955 mt jet fuel to the US in Q1, and Chinese exporters have been looking for opportunities to export more refined products to the US.
NATURAL GAS AND LNG
- Much to the surprise of many, China included US natural gas on the list of items for higher import tariffs, but LNG was exempt. Natural gas falls under the Harmonized System code of 27112100, while LNG carries an HS Code of 27111100. The LNG HS code was not on the list, clearly indicating that Beijing did not plan to impose the 25% tariff on US LNG imports.
- China imports no natural gas from the US, but is on track to become the largest buyer of US LNG this year.
- China has imported nearly 1.25 million mt of LNG from the US in 2018 to date -- versus 1.61 million mt in all of 2017 -- only behind Mexico and South Korea, according to data from S&P Global Platts Analytics.
- China's tariffs on US ethanol imports would block an estimated 20 million gal/month of shipments, dealing a blow to US producers' export ambitions and make China's own E10 target unreachable, according to Platts Analytics. It would likely be impossible for China to meet its target to blend 10% ethanol into nationwide gasoline supplies by 2020, Bruce Pickover, Platts Analytics' senior director for global biofuels, said. China currently blends about 2-2.5%.
- China has been the main buyer of US soybeans so far in the 2017-2018 marketing year at 28.674 million mt, which represents 55.7% of the total US exports, according to data from the Department of Agriculture.
- China's threat of tariffs on US soybean has pushed up exports as buyers try to acquire cargoes before the duties come into effect.