In our last Tariff Series post, we covered the basics of the tariffs that are roiling markets around the world. In this post, we will look closer at the effects those tariffs are having on the U.S. plastics industry, using comments and perspectives of M. Holland executives and real-life examples of pricing and shipping disruptions
U.S. tariffs can be separated into two categories: the Steel and Aluminum Tariffs, which affect almost every one of its trading partners, and the Tariffs on China, which have escalated to a full-blown trade war.
Of these two, more immediate plastics industry disruption has come from the trade war with China. And this disruption shows no sign of slowing down either, with the U.S. administration’s recent announcement of more tariffs on $200 billion of Chinese goods, and China’s plans for retaliation.
Yet already, the first round of $50 billion has caused disruption far beyond the U.S.-China trade relationship. In addition to the direct effects of the tariffs themselves, the closing of the Chinese market “just when our industry was ready to supply China’s large and growing demand,” the plastics industry is also witnessing:
Below, we’ll take a closer look at these repercussions, as well as the overall market conditions they produce.
Due to the direct effect of China’s retaliatory tariffs, many U.S. resin exports – including polypropylene, polyethylene, vinyl, fluoropolymers, acrylic, polycarbonate, and polyethylene terephthalate – are 25% more expensive there, effectively closing the Chinese market to trade with the U.S.
However, many shipments of materials were already en route to China when the tariffs kicked in. This left an oversupply of U.S. resin exports in the region looking for a home. And as these materials cannot stay at sea indefinitely, traders may have to accept lower prices to get rid of them, particularly in SE Asia.
“You had all this product purchased, bagged, and ready to go,” said Tracy Coifman, M. Holland’s business development manager in Latin America, “now traders have to reroute it to Southeast Asia, because it was all on a boat that was going to the region anyway.”
While M. Holland does not export to China, the pricing and route changes in Asia affect all plastics trade, as other countries must now fill the void in Chinese resin demand. This is being done by many countries in Europe, the Middle East, and also China’s neighbors in Asia.
One company, a U.S. plastics machinery exporter, has attempted to solve the problem with a bonded warehouse in China. This is a warehouse that houses the company’s exported goods until they are ready to sell in the Chinese market –the tariffs are applied only at the point of sale . The danger, however, is that the warehouses will fill up long before the tariff battles are over, forcing the company to cut prices to monetize its inventories.
The domino effect of these shifting export destinations reaches back home to the U.S., where huge investments in petrochemicals capacity have made North America a significant net exporter of resins. In 2017, 11% of U.S. resin exports were to China, making plastic resins one of the few manufactured goods where the U.S. enjoys a trade surplus with the world’s second largest economy. Moreover, China was expected to be a growing market for new U.S. capacity. Where will those exports go now? The answer is similar to what is happening in SE Asia.
“With China not buying, the supply chain in North America is getting full,” said Xavier Lebrija, director general of M. Holland Latinoamerica. “So producers and logistics operators need to put those pounds somewhere, and of course Latin America is the first choice.”
“So we’re getting a whole bunch of very inexpensive resin that is flooding our markets,” Lebrija added.
Complicating matters even more, some companies, which rely on raw materials from China, are being forced to raise prices. For example, Texas-based chemicals company Celanese Corp. raised prices on its thermoplastic materials, after U.S. tariffs on China included many of Celanese’s raw materials.
As the abundance of plastics materials in the North American supply chain causes prices to drop, that same abundance causes the price of moving those materials to increase.
The confusion in trade routes and fluctuation in prices means it is taking longer to sort out where materials will find a home. The longer that takes, the more disruption there is in shipping, packaging, and warehousing.
For example, one U.S. logistics company that provides trucking, terminal, packaging and warehousing needs exclusively for the plastics industry recently raised prices by as much as 40 cents per pound for some of these functions, and removed its usual “free time” for storing materials that have already been packed.
“There’s a lot of backlog,” said Coifman. “We are seeing longer than normal transit times, especially in the U.S. rail system because companies are trying to figure out where everything’s going to go.”
Coifman also gave the example of resin crossing the U.S.-Mexico border, which usually takes no more than 24 hours. In the week of Aug. 13, this same crossing was taking more than four days.
Similar bottlenecks have occurred in Houston, the nation’s leading port for resin exports.
Shipping and transportation are not the only areas seeing delays. Suppliers and producers are also seeing delays in their customers’ orders. As Lebrija explains:
“Customers are holding on to inventory and waiting things out to see what happens. They’re trying to get the best possible price,” with the expectation that prices will continue to drop as trade tensions continue.
The danger here is of “stocking out,” or waiting so long to put in orders that supplier inventories are already exhausted.
“Yes, pricing is on the downward side,” Coifman added, “but if you skip a month or wait too long to time the market for the best deal, you’re going to stock out. The logistics have become very complicated, and there are delays everywhere in the pipeline.”
With rapidly-changing headlines and trade developments, companies must also keep exchange rates in mind.
The U.S. dollar has been gaining strength relative to most other currencies. Though perhaps a boon for domestic consumers, foreign exports often become more expensive.
“[U.S.] pricing may be low,” Coifman said, “but if other currencies are fluctuating, those countries may be worried about importing. By the time U.S. exports get to customs clearance, if the other country’s currency isn’t favorable, [importers] could lose money on the exchange.”
The prevailing market attitude is one of heavy uncertainty.
“We’re right in the middle of a perfect storm, so it’s very hard to understand and gauge how it’s going to turn out,” Lebrija said.
Yet both Lebrija and Coifman believe that markets are experiencing a temporary product shift more than anything else – and that, once new shipping routes and export destinations get sorted out, pricing and industry growth will return to normal.
For example, as Latin America sees fewer imports from the Middle East and Korea – because those exporters are diverting more of their product to fill the gap in China – more product will have to come from the U.S. But this balancing process takes time, and it comes at a particularly difficult moment in peak shipping season.
“This water tends to find its level,” Lebrija said, noting that he expects pricing and export disruptions to continue through September, but to start to balance out in October.
“I try to look at it favorably,” Coifman added. “The [trade battles] are creating lots of opportunities – we’ve just got to find where those are in all this mess.”
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