[Analytics] Two Chinese chemicals firms are being hit on multiple fronts by the trade war in US

Shandong companies Yuhuang Chemical and Wanhua Chemical are spending billions on factories but are being hit by both tariffs from China and the United States. US companies are also being hit by Donald Trump’s tariffs which are threatening ‘renaissance’ in the American chemicals industry. Cissy Zhou, Finbarr Bermingham specially for the South China Morning Post.

US President Donald Trump’s trade war with China has thrown a spanner in the works of two Chinese chemicals companies spending billions of dollars building factories in the United States.

Yuhuang Chemical was started in 1994 by a village branch of the Chinese Communist Party in Shandong Province, but in 2014, it raised some eyebrows when it announced plans to build a US$1.85 billion methanol plant in St James Parish, Louisiana.

Last year, Wanhua Chemical, a listed company also from Shandong, followed suit with plans to build a US$1.25 billion plant in the same town in Louisiana, which has a population of just 21,367.
Both companies were attracted to this sleepy town in the Deep South because of its proximity to America’s booming shale gas industry, which gives chemicals companies cheap access to the components they need to make their products.

In 2017, the US produced 71.1 billion cubic feet of natural gas per day, more than any other country in the world, with large swathes of that coming from newly-discovered shale gas, buried deep underground within shale rock formations.

Chemicals companies from China, Japan and Taiwan have been flocking to the US’s shale hubs, drawing up manufacturing blueprints that would allow them to tap the abundant and cheap energy stores.

In April last year, Taiwanese company Formosa Petrochemical Corporation unveiled plans for a massive US$9.4 billion chemical manufacturing plant, also in St James Parish, employing 1,200 workers.

This was one of 333 announced chemicals manufacturing projects, as of September 2018.

“The US chemicals industry is in a renaissance period, where we’re growing, adding more chemical manufacturing capacity to the tune of US$202 billion. There are plans to build all over the US, particularly the Gulf coast, Appalachia, Pennsylvania, much of that investment is foreign,” said Edward Brzytwa, director for international trade at the American Chemistry Council.

The added bonus for foreign companies is that, theoretically, if you are making and selling in the US, you stand a better chance of avoiding tariffs placed on imports.

But not if you are selling back to China, which is what Yuhuang and Wanhua planned to do, and the companies are now being hit on multiple fronts by the tit-for-tat tariff war between the US and China.

In a 2014 statement, Yuhuang made clear that most of the methanol it made in Louisiana would be exported to Shandong to produce downstream Chinese chemicals, with just 20 to 30 per cent to be sold on North American markets.

“These companies will sell their products back to China, to downstream companies or to process them into relatively more advanced products, then export to other countries with added value,” said Wang Haibin, an analyst at Sinochem, the Chinese state-owned chemicals giant.

China, which makes 40 per cent of the world’s chemicals, has imposed tariffs on most chemicals imported from the US, Wang said, “which will definitely affect their plans”.

In addition, Trump’s tariffs on steel and aluminium, imposed in March last year, have had a serious impact on Wanhua’s plans to build their St James Parish factory.

The tariffs will add “tens of millions” of US dollars to construction costs, the company’s US general manufacturing site manager James Newport told US media, since Wanhua was using steel imported from China to build key parts of the plant.

To compound matters, Trump ordered a new round of tariffs on US$200 billion of Chinese goods in September 2018, including a large number of chemicals products.

Among them was methylene diphenyl diisocyanate (MDI), a chemical used in the manufacturing of polyurethane, a critical component of spray foam insulation for residential and commercial buildings.
China is the world’s biggest MDI exporter and Wanhua holds around 15 per cent of the US market. It imports its MDI from China and the tariffs led it to threaten to scrap its plans for Louisiana.
In a public hearing in August, Newport said that “imposing additional duties on MDI and aniline [a key component of MDI] may jeopardise Wanhua’s plans to invest in the new facility in Louisiana”.

“Wanhua’s expansion plans depend on having enough MDI in the US to justify the potential new plant. As the costs to acquire MDI from China increase, downstream users will face higher prices and short supply because local capacity cannot meet demand, disproportionately harming small and medium-sized businesses and consumers,” Newport said in his five-minute testimony.

He requested that the Trump administration remove MDI and aniline from the list of products currently subject to 10 per cent tariffs, rising to 25 per cent on March 2 should negotiators not reach an agreement that would end the trade war.

Despite Wanhua reporting a drop of 56 per cent in profits for the first nine months of 2018, the company has not followed through with the threat.

A company statement in November said it would move forward with construction of the plant, which is due to be finished in 2021.

Wanhua Chemical declined to comment when contacted by the South China Morning Post.

Yuhuang, meanwhile, is due to finish building its factory in mid-2020 and is also wrangling with US tariffs on Chinese exports.

A company official said that they had not exported to the US for years due to a combination of capacity issues as they have enough demand at home and trade tariffs.

“Our biggest market is the domestic market. We export some of products to Southeast Asia because there is no tariff,” said a member of the company’s international trade department, who declined to give her name.

She said she was still optimistic about the prospect of their US production facility.

“The policies are likely to ease this year,” she added, hoping that the trade war does not persist.
For representatives of the US chemicals industry, the tariffs are viewed as problematic across the board.

“The 10 per cent is very concerning for a number of our member companies. Many of them are importing from China, not just to sell chemicals inside the US, but to make chemicals in the US. They’re making feedstocks and raw materials, which they make into various chemicals. They have buyers in the US that rely on these,” said Brzytwa.

He added that while many of the American Chemistry Council members are appreciative of the need for reform in China on issues such as intellectual property theft and forced technology transfer, “on the other hand the tariffs are making our lives more difficult”.

An American Chemistry Council report found that 1,517 chemicals and plastics products valued at US$15.4 billion are exposed to the tariffs.

Meanwhile, retaliatory tariffs on US$11 billion of US chemicals and plastics exports to China “have put nearly 55,000 American jobs and US$18 billion in domestic activity at risk as a result of reduced demand for those products”, the report said.

“Our members are very worried about that. The more tariffs you apply, the more complex it gets. Some may not follow through on investment, they may not hire. The chill on the investment is something we worry about, particularly if the trade war expands,” Brzytwa added.

Brzytwa said that companies are afraid they will have to spend more on customs and tariff compliance than on innovation, which would be a hindrance to the chemicals industry, but also the US economy.
He added that members are worried that US policy could escalate and turn into trade wars with other countries.

In China, meanwhile profits in the chemicals industry are falling, according to data from Industrial Securities, a Fujian-based financial company, which showed “slight month-on-month decline” for basic chemicals manufacturers’ profits at the end of last year.

There are fears that the relative chemicals downturn could feed into the wider slowdown and job losses being felt across China’s economy.

“The imposed tariffs will not only affect Chinese exports of basic chemicals, but also chemical products in broader terms such as chemical fibre clothes and shoes, which would have a further impact on employment,” said Sinochem analyst Wang.