Tough for China to buy enough U.S. crude, coal, LNG

The big, unresolved question from the initial trade agreement between the United States and China is what happens if Beijing cannot meet the massive jump in required commodity purchases.

While the agreement is a welcome development in de-escalating tensions between the world’s two biggest economies, it apparently makes commitments that China will find almost impossible to fulfil.

Beijing has agreed to increase purchases from the United States by $200 billion over the next two years over and above the level of imports in 2017, according to U.S. Trade Representative Robert Lighthizer.

China imported about $130 billion in U.S. goods and $56 billion in services in 2017, prior to the start of President Donald Trump’s tariff dispute in 2018.

While there is scope to boost China’s imports of U.S. manufactured goods and services, it’s clear that the heavy lifting will have to be in commodities, namely agricultural items such as soybeans and hogs, and energy such as crude oil, coal and liquefied natural gas (LNG).

It’s here that the maths becomes really tricky for the proposed initial trade deal, and it becomes apparent that even with the best will in the world, Beijing will struggle to meet the additional $200 billion target.

In fact, China’s imports of U.S. crude were steadily rising prior to the start of the trade dispute, only to plummet as the tit-for-tat tariff war escalated.

The best month for Chinese imports of U.S. crude was June 2018, the month before the tariff war started, when 466,000 barrels per day (bpd) arrived at Chinese ports.

The average for the first six months of 2018 was 344,000 bpd, according to Refinitiv vessel-tracking and port data.

Assume a near tripling in China’s imports to around 1 million bpd, and this delivers an annual revenue of about $21.9 billion, assuming an oil price of $60 a barrel, which is in line with the current West Texas Intermediate futures price of $59.85.

LNG was another promising growth area of U.S. exports to China prior to the trade dispute, with 25 cargoes carrying a total 1.73 million tonnes of the super-chilled fuel arriving in the first six months of 2018.

Assume a tripling of this rate, annual imports would be 10.4 million tonnes, which would represent about 20% of China’s total current level of LNG imports.

At current Asian spot prices LNG-AS of around $5.65 per million British thermal units, this would equate to about $302 per tonne of LNG, meaning 10.4 million tonnes would be worth about $3.14 billion.

Assume that can triple, and it’s all the more costly coking coal grade, then annual coal imports would be around 36 million tonnes.

The current price of coking coal is around $137 a tonne, meaning annual imports of 36 million tonnes would be worth around $4.93 billion.

TOO MANY SOYBEANS?

While China agricultural imports from the United States could increase in theory, in practice this may be very difficult to achieve.

The value of U.S. agricultural exports to China was about $24 billion in 2017, and Lighthizer said Beijing would buy an additional $16 billion-$26 billion annually for the next two years.

This looks wildly optimistic given that soybeans were about half of China’s agricultural imports from the United States by value, and demand for soybeans has plunged given the sharp drop in China’s pig herd as a result of the African swine flu epidemic.

Agricultural exporters such as Brazil, Argentina and Australia may well be prepared to lower costs to make it harder for U.S. exporters to ship products and still make a profit, and this could also be the case for energy products.

Overall, while any progress in the trade dispute is positive for the global economy, there appears a very real risk that the commitments on imports supposedly undertaken by China are so heroic as to be unachievable. (Editing by Muralikumar Anantharaman)

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