The Next Chinese Tariff Move No One's Talking About
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The Next Chinese Tariff Move No One’s Talking About

by | published June 5th, 2019

My attention these days once again is directed toward China.

Three of my analytical interests this week have been converging on Beijing:

  • Examining how the Chinese government intends to bypass U.S. Iranian sanctions (the subject of an installment of “Dark Files” sent to my Energy Inner Circle subscribers),
  • Handicapping the likelihood that China will arrest the flow of rare earth minerals (both raw and processed) to the U.S.; and
  • How an intensification of the American-Chinese tariff will impact global energy demand.

Now, each of these three directly affects energy.

Today, however, I will focus on the Beijing response to a combination of rhetoric and tariff moves emanating from Washington.

Let’s get started…

The Game of Tariffs Continues

In the battle of the tariffs, China has been walking an increasingly narrow tightrope.

On the one side is the reality that the U.S. imports much more from China than China does from the U.S. Put simply, the U.S. has more targets upon which to apply tariffs (fees) and/or quotas (number of articles allowed) in a tit-for-tat tariff spat than does China.

On the other side, China had been increasing imports of U.S. crude oil, refined oil products, and more recently liquefied natural gas (LNG). Until the trade war surfaced in earnest, China was slated to be a main rising customer for American energy exports.

This had appeared to be a win-win situation. As global energy demand dramatically shifts to Asia, the largesse in U.S. shale and tight oil/gas reserves was slated as a ready provider of essential imports.

Beijing has been intensifying its efforts to secure alternative exporters, along with further movement in developing domestic renewable and unconventional sources. China has also become the world’s leader in next generation solar and wind technology.

Yet the extent of a response that centers about depriving its markets to U.S. energy exporters is debatable. Thus far, reductions in overall imports of American crude oil and refined oil products have taken place, and the ramping up of U.S. LNG has been tempered.

With American farmers already in the crosshairs of significant cuts in product exports to China, a similar salvo against oil and gas producers would seem to be a ready-made second salvo against sectors harboring political support for Trump in the U.S.

Well, as a political weapon any Chinese energy move is more limited…

What the Chinese May Do to American Agriculture

Beijing has been successful in locating other sources of soybeans (for which it is the world’s leading importer) and other agricultural commodities, even if that has been difficult and occasionally more costly.

That does not bode well for U.S. farmers when the tariff matters are finally resolved.

There is certainly no guarantee that the orders now being filled in places like Brazil will be returning to the American heartland anytime soon. And in an unusual move, word has come this week that China is placing millions of tons in soybean imports already received from the U.S. in storage, rather than to use them for feeder stock.

Contacts in international commodity exchange tell me the move is unexpected, given that China will soon be moving into the annual period in which soybean as the basis for feed stock is at its height. One of my contacts has suggested this may be a move to develop a commodities collateral base to negotiate longer-term deals and contract swaps in the broader market.

That hardly is encouraging news for the American Midwest.

But energy is another matter.

Any major move to replace U.S. volume with oil and gas coming from other providers will have two problems for China.

The first is geopolitical…

We’re Headed Toward a Dangerous Game of Geopolitical Chicken

A ready source for both additional piped oil/gas and LNG shipment could well be Russia – that creates its own unsavory dynamics.

Beijing has apparently negotiated tough import contract deals with energy currently coming from Russia. Such prices are never made public, but my network believes it is at the low end of profitability for Russian exporters Transneft and Gazprom.

Moving back into market negotiations with Moscow will be difficult for Chinese officials in an environment where everybody knows they are in a weakened negotiating position.

The LNG situation, on the other hand, may become more acute.

Beijing is only a few months away from having to lock in winter import volumes. Last year, LNG levels were miscalculated, and retail gas prices rose to their highest levels in years, a scenario probably confronting China this time around, and any alternative supply will be coming in at premium prices.

Despite the spin coming from Washington, the claims that the “other side” bears the cost in a trade dispute is patently false.

Those who end up paying the tariff or competing for fewer goods (the intent when quotas are applied) are always consumers in the importing country.

When the tariffs are applied to targets for which there is a value-added product chain in the importing market, the price add-ons may easily occur at several stages. Such is already underway in the U.S. price for solar installations, appliances, and just about anything requiring steel or aluminum.

That last consideration is also bad news for American farmers. Reeling from the loss in commodity exports, they now will have to contend with escalating prices for farm machinery and equipment.

And countering with the argument that these can be exchanged for U.S. domestic production is a red herring.

Yes, the product is available for switch. Unfortunately, it is also more expensive, further adding to the price tag at the end.

It is the impact on knock-on employment and small business prospects that usually ends up being the most distasteful effect to shoulder. Rallying around the flag in a trade dispute is always more difficult if the demonstration of patriotism is taking place in an unemployment line.

Anecdotal evidence exists that in solar (the U.S. sector in which the impact of the Chinese dispute has existed the longest), for each domestic production job created by relying on U.S. panel production, almost six have been lost further downstream in lost sales due to increasing costs.

On the Chinese side, the domestic problems can become even more acute. By cutting imports of U.S. energy and agricultural products, the addition to end user prices are going to be even more pervasive… and expensive.

As all of this impacts global economic growth projections, one concern is surfacing:

There is a dangerous game of chicken developing here.

Sincerely,


Kent

P.S. Despite the tariff war and the effects it may have on energy, the U.S. is still the top crude oil producer in the world, beating out even Saudi Arabia, the de facto leader of OPEC. And there’s one place deep in Texas that helped us get there. It’s an oil deposit with 20 billion barrels of oil, 16 trillion cubic feet of natural gas, and an estimated value of $1.4 trillion. That’s trillion with a capital T. If you’d like to learn more about this – and how you can profit from it – just click here for more information.

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  1. Pete Ekstrand
    June 5th, 2019 at 20:47 | #1

    The reduction of shipments and/or much higher prices for rare earths seems to be China’s best weapon in any trade dispute (with ANY country). Agreed, and comments?

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