Trade War Extends, Tension Escalates

On August 3, China announced that it will be imposing retaliatory 25% tariff on LNG from the US. In the official statement, the authorities said, it was retaliatory measure in response to July 10 announcement of 10% tariff on Chinese goods worth $200 billion. The authorities stated the step was taken in light of announcement from Robert Lighthizer, that additional tariff imposition is being considered. The dates of implementation of these tariff imposition is still cleared from both sides.

Key Updates: Since announcement of tariff from the US on July 6, there have been many rhetorical words exchanged between the two sides. The Chinese yuan also witnessed relatively sharp decline in the exchange rate market. The US stated that they are looking closely if the currency devaluation was intentional from Chinese counterpart. It is to note that the Chinese Yuan is not free float currency and authorities fix the limit of fluctuation. So, the continuous decline in the exchange rate may indirectly convey the signal of intentional devaluation against the trade-war imbalances. Further, the internal extended quantitative easing by People’s Bank of China (PBOC) is also contributing towards the currency devaluation.

Market Exposure: China recently extended and restructured its energy related guidelines and targets. China has been looking to replace the conventional coal-based plants & boilers with natural gas fired counterparts. This was directed for cleaner air availability to its population and reduce pollution levels. This resulted in massive imports increase by China from all major markets globally, including the US. As per the reports, China imported 1.8mtpa of LNG from the US from January to July this year. This is almost one fifth more than the 2017 value.

Impact: The tariff imposition on LNG would mean lesser opportunities for the US suppliers when suppliers from other markets become more competitive in the growing segment. Although, this may also result in relatively slower growth of LNG in the domestic market, yet the government support and deep pockets are expected to minimize the results. On the other hand, the currency devaluation is expected to continue in near future on backdrop of trade war providing extra edge to the competitive Chinese chemical market. Analyst are currently of the opinion that the current trade war is far from over and some more developments are expected to unfold in the coming weeks.

– Ankur Kalra,
Manager – Chemicals & Materials,
Infoholic Research