Tariff, Bans & New Capacities – Ambiguous Future of Petrochemical Trade

We have been hearing a lot on the US-China trade war with rounds of tariffs imposed on the imports by each country. But less is known towards the holistic system as in what can be expected from the global chemical and petrochemical trade in near to long term. Let us try to understand market dynamics from three governing parameters (regulatory, supply, and demand) and attempt to assess the trade view of future chemical trade.

Regulatory – The recent spat of tariffs and taxes have been known to everyone. The estimates suggest that the US customer shall have to bear $50 billion more cost due to new tariffs while the US producers shall have opportunity (for product) and limitation (for raw material) to play in high price world. For the US chemical exports, polymers such as linear low density polyethylene (LLDPE) will have to bear extra price pressure in Chinese market. On the other hand, the Chinese presence and influence across developing regions, including South Asia, Africa and Latin America, is expected to help in balancing the situation for Chinese trade.

Supply Scenario – Over the past years, the markets have been offering different opportunities for corporates to build capacities. The specificity and the degree of evaluated potential benefits attracted the corporate investments in in various geographies with leading manufacturing coming in China, shale gas dependent capacities in the US and raw material capabilities in developing nations. In chemical industry, the biggest game changer for the US was shale gas and ethylene derivatives dependent on it. The tariff on polyethylene and specifically LLDPE would make it even more difficult for export-oriented capacities coming online in next 4-5 years to fight for market share, especially when China would be relatively difficult market. The US players might have to come down to price war like situation making things worse for naphtha-based ethylene and polyethylene producers.

Consumer Demand – Global consumer market is growing fast, especially with improved economic results in the western hemisphere. The concerns of political tensions and increasing protectionism is expected to play role in limiting the demand growth, yet the markets are growing steadily. In terms of polyethylene, the expansions across the capacities were taking backstage watching out the US installations, the global demand is growing and has the potential to absorb demand, especially in developing geographies such as South Asia, Africa, and Latin America. While in terms of the US-China trade matters, the re-routing or pricing strategies are expected to find new balance in some time, absorbing the effect of tariff changes by both sides.

Hence, the global trade economy for petrochemicals is expected to witness few shocks and emergence of new trends. But the overall picture of long term growth is almost certain with shuffling of routes and margins along the way.

Ankur Kalra,
Manager – Chemicals & Materials,
Infoholic Research