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Why a US-China Trade Pact Will be a Boon for US Chemicals

Anindya Barman
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The United States and China are inching toward a trade deal that could lead to a potential end to the year-long trade spat between the world’s two biggest economies.

The countries, which are engaged in a fierce trade conflict since last year, are in the final stages of negotiation for a deal that could see the roll back of most of the U.S. tariffs on $200 billion worth of Chinese goods as long as Beijing pledges to lower retaliatory tariffs on U.S. products, protect intellectual property rights and purchase a significant amount of American-made products.

Top trade negotiators of both countries are currently discussing “major issues” that must be resolved before the parties could hammer out a formal deal to ease the trade disputes that have cost both economies billions of dollars. One of the top priorities of the U.S. administration is to achieve structural changes to end China’s unfair trade practices. If everything goes well, a deal may happen by the end of this month.

U.S. Chemical Industry Bearing Brunt of Trade Tariffs

The chemical industry is among the industries that have been badly hit by the trade tariffs. The damaging effects of the trade war were evident from the industry’s lackluster performance in 2018. The U.S. chemical industry, in particular, is caught in the crosshairs of Sino-U.S. trade tensions.

The Trump administration slapped punitive tariffs on $250 billion worth of Chinese products last year while China has imposed retaliatory tariffs on $110 billion in U.S. goods. China’s tariffs on American products include a wide range of petrochemicals, specialty chemicals and plastics. The list includes chemicals such as polyethylene, polyvinyl chloride (“PVC”) and polycarbonates.

According to the American Chemistry Council ("ACC"), a leading industry trade group, the United States has levied tariffs on $15 billion worth of imports of chemicals and plastics from China, with Beijing retaliating with duties on $11 billion in U.S. exports of chemicals and plastics to China.

Progress on trade negotiations in February led the Trump administration agreeing to hold off raising tariffs (to 25% from existing 10%) on $200 billion in Chinese goods that would have taken effect March 1. However, the tariffs currently in place are already doing damage to the chemical industry.

China is one of the biggest export markets for U.S. chemicals, leaving the American chemical industry heavily exposed to China’s countermeasures. The tariffs have created an uncertain demand environment for U.S. chemical products in this major market. The tariffs are hurting U.S. chemical exports and the competitiveness of the American chemical industry.

According to the ACC, China’s tariffs on U.S. chemicals and plastics exports have put roughly 55,000 American jobs and $18 billion in domestic activity at risk as a result of lower demand for those products, which would lead to considerable losses for U.S. manufacturers. The ACC estimates that the loss to U.S. chemical and plastics exports to China could reach as much as $6.1 billion annually.

There is also concern that the tariffs may dampen new chemical investment in the United States. According to the ACC, 333 chemical projects (both on new plants and capacity expansions) have been already announced by chemical makers since 2010 worth $202 billion. A significant portion of the investment is directed toward U.S. export markets including China.

The shale boom has incentivized a number of chemical companies to pump in billions of dollars for setting up facilities (crackers) in the United States to produce ethylene and propylene in a cost-effective way. Chemical makers including DowDuPont Inc. DWDP and LyondellBasell Industries N.V. LYB are investing on shale gas-linked projects to take advantage of abundant natural gas supplies.

However, the tariffs have raised concerns that chemicals companies would reconsider their investments in new projects, which could lead to a slowdown in growth in the American chemical industry.

Trade Truce Will Bring Respite

A U.S.-China trade pact, if eventually takes place, will likely provide a much-needed relief for the U.S. chemical industry. As part of the trade deal, China is reportedly offering to lower tariffs and other sanctions on U.S.-made goods including chemicals, automotive and farm products. Beijing has also reportedly pledged to import a significant number of U.S. products.  

The ACC has urged the United States and China to remove all chemical products from their tariff lists. The trade group has also appealed to the Trump administration to include chemicals and plastics on Beijing’s import list as the United States seeks commitment from China to purchase more American products. The ACC sees this as “the most promising and advantageous opportunity for U.S. export growth”.

China is among the most important trading partners of the U.S. chemical industry. Moreover, export markets are expected to contribute to the growth of the American chemical industry in 2019.

The ACC expects growth in manufacturing and exports markets to drive demand for U.S. chemicals this year. As such, a potential trade deal could provide a significant boost to American chemical exports which would augur well for the U.S. chemical industry’s growth this year and beyond.
 
Chemical Stocks Worth a Look


A few stocks currently worth considering in the chemical space are Ingevity Corporation NGVT, Innospec Inc. IOSP and W. R. Grace & Co. GRA. Both Ingevity and Innospec sport a Zacks Rank #1 (Strong Buy), while W. R. Grace carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingevity has an expected earnings growth of 17.9% for the current year. Earnings estimates for the current year have been revised 2.7% upward over the last 60 days.

Innospec has an expected earnings growth of 3.5% for the current year. Earnings estimates for the current year have been revised 5.3% upward over the last 60 days.

W. R. Grace has an expected earnings growth of 10.4% for the current year. Earnings estimates for the current year have been revised 2.9% upward over the last 60 days.

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