Fresh US-China Trade Talks May Help Restore Some Commodity Flows

- Dec 03, 2018 -

The United States and China have agreed to resume trade negotiations and temporarily halt further tariff hikes, which should help restore trade flows for some commodities like agriculture and petroleum that had come to a halt between the two countries.


The provisional cessation of trade hostilities is likely to benefit US exports of soybeans, crude oil and liquefied natural gas to China, all of which had tapered off following the implementation of retaliatory tariffs or by the threat of new tariffs by Beijing.


The US will not raise tariffs on $200 billion worth of Chinese goods to 25% from January 1 and will leave it at the current level of 10%, the White House said in a statement during the weekend.


It said this will hold for a 90-day period during which negotiations will be held on issues like forced technology transfer, intellectual property protection, and agriculture.


"China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries" the statement said.


"China has agreed to start purchasing agricultural product from our farmers immediately," it added.

The announcement was made following US President Donald Trump and Chinese President Xi Jinping's meeting on the sidelines of a meeting of the Group of 20 industrialized nations in Buenos Aires over the weekend.


IMPACT ON AGRICULTURAL COMMODITIES


At the time of the announcement, Beijing's 25% tariffs on US agricultural products, mainly soybeans, were still in place and it was unclear how China would start purchasing agricultural products from US farmers immediately.


The 25% tariff was implemented on 6 July 2018, but its effects have only really started to show since the start of the fourth quarter, as 55% of US soybean exports to China occurred between October and December, Peter Sand, chief shipping analyst at trade body BIMCO said last week in a report.


He said US soybean exports to China had dropped by 98% since September 1, the start of the 2018-2019 marketing year, compared to the same period last season. China has taken just 2.8% of US soybean exports since Sep 1.


"If Chinese farmers decide they need fewer soybeans to feed their livestock, the overall Chinese demand for soybean could be permanently reduced, even if tariffs are removed," Sand said.


IMPACT ON CRUDE OIL


In the last round of tariffs effective September 24, the Office of the United States Trade Representative had imposed 10% tariffs on $200 billion worth of Chinese imports, and said this would be raised to 25% on January 1.


This would have resulted in retaliatory tariffs by China including new ones on US crude imports that have been exempted so far, and the possibility of raising tariffs on US LNG imports to 25% from 10%.

However, with the latest ceasefire, this is unlikely to happen and market participants now expect a window of around four months to conduct US-China crude trade.


"It is difficult to say when we will resume importing US crude oil. Actually the window had not closed as crude did not attract any tariffs. So it is unclear why the flows dried up," a Unipec official said.


China's crude oil imports from the US fell to zero in October for the first time since February 2017, latest data released by the General Administration of Customs showed. US-China crude flows were expected to remain thin due to the trade tensions.


S&P Global Platts trade flow software cFlow showed that only a single 1-million-barrel cargo had arrived in China from the US in the fourth quarter so far. The cargo, on board the suezmax tanker SKS Segura, was discharged at the end of October, but will likely be recorded under November imports.


"A positive outcome of the trade talks between China and US over the weekend will be key for reviving imports from the US," said Grace Lee, senior analyst with S&P Global Platts Analytics.


As of last week, three buyers had emerged in the US market to book VLCCs for loading in late December for the voyage from the US to China, according to market sources and shipping fixtures.


fixtures showed the VLCC New Pioneer had been fixed for a December journey from the US Gulf Coast to China last week, and the VLCC Manifa had been booked for a trip to Ningbo, in China. In addition, Unipec had booked the VLCC Arafura for a US Gulf Coast to China voyage.


Despite the lack of crude flows in October, the US remained China's 10th largest crude supplier in the January-October period, doubling its volume year on year to 12.14 million mt, GAC data showed.


IMPACT ON LNG MARKETS On November 11, China received its first LNG cargo from the US since it imposed a 10% retaliatory tariff on US LNG imports effective September 24.


The cargo was delivered to China's state-owned CNOOC at its Ningbo terminal, on board the LNG carrier Ribera Del Duero Knutsen, which lifted the cargo from the Cheniere Energy-operated Sabine Pass LNG export plant on the USGC on October 10.


US LNG cargoes originally destined for China have been diverted to other markets, but Singapore-based LNG traders said weak LNG demand in North Asia partly contributed to the smaller volumes as a 10% tariff can be absorbed during peak winter season.

The US-China ceasefire may not boost US-China LNG volumes significantly.


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