Chinese tariffs won't stop US resin export wave

  • 04-Apr-2019
  • Chinese tariffs won't stop US resin export wave

After a few false starts, a massive wave of US polyethylene resin exports will begin testing containerized supply chains later this year and for the foreseeable future. Chinese tariffs will slow the wave, but they won’t stop it. There’s a sense of confidence among some producers and transportation providers that they’ll be ready. Even so, they are clear-eyed about the labor challenges in the plants themselves and in securing skilled drivers able to truck the goods to marine terminals.

Unexpected domestic demand sapped some of the strength of resin exports last year, but analysts and transport providers are expecting an acceleration of outbound shipments in the second half of this year. The extent of the growth is hard to gauge since Chinese tariffs — part of a larger tit-for-tat trade war with the United States — have made most polyethylene product exports financially unfeasible.

Optimism of a tariff resolution, coupled with United States’ role as a polyethylene powerhouse, are keeping expectations up for continuing strong exports. Joel Morales, senior director of polyolefins for North America at IHS Markit, parent company of JOC, estimates that containerized exports of polyethylene will reach 1 million TEU in 2019. Last year, containerized resins exports rose 13 percent year over year to 677,000 TEU, according to PIERS, a sister product of JOC within IHS Markit.

Chinese tariffs of 25 percent on US-produced polyethylene goods, ranging from the raw material of resin pellets to finished plastics, have already taken a toll on volume. Resin exports to China last year rose only 2 percent year over year. It hasn’t been easy or profitable exporting more to countries other than China, which accounted for half of polyethylene exports in 2017. US-based producers are exporting more resins to Europe and South America. While turning the taps back on to China isn’t difficult, replacing such as sizable market is.

“There is nothing that will stop the US exports from moving unless something happens in natural gas-crude oil relationships and there is no longer a cost advantage,” Morales told the annual World Petrochemical Conference (WPC) in San Antonio on March 19.

Over the next five years, approximately 6.4 million metric tons of polyethylene production capacity will come online in the United States, according to IHS Markit research. Comparatively, about 4.2 million metric tons of US capacity was added to the market between 2014 and 2018.

Morales expects the majority of the resins produced to be moved through Port Houston, but other ports will see rising volumes as well. Last year, Houston handled 42 percent of US resin exports and New Orleans handled 19 percent. New York and New Jersey and Charleston handled about 7 percent each, according to PIERS.

Moving all that volume comes with multiple challenges, said Tushar Bhuta, global supply chain director at Vinmar, a marketing and distribution company serving the polyethylene industry. The rise of resin volumes in recent years has made clear the weaknesses inherent in the US polyethylene export supply chain, from a shortage of packaging capacity to railcar capacity, he said.

And producers and transportation providers have responded. There are more than 30 resin packaging machines now to support producers compared with just 11 in 2015, bringing more than 5 million metric tons of annual capacity to the industry.

Petrochemical producers have bought more railcars, coupled with investments by producers and Class I railroads, to expand rail capacity. With railcars costing up to $120,000 apiece and plants needing thousands, producers also have gotten better at using their capacity, Bhuta said.

“The railcar companies can really bring you down on your knees if you don’t manage your flow of railcars properly,” he said at the WPC conference.

Bhuta praised Port Houston for stepping up to meet polyethylene export demand, noting that some producers were nervous about whether the port and supporting freight networks were up to the challenge. The port has attracted liner services from Asia, bringing more outbound capacity, and invested more than $1.3 billion to handle additional volumes. Bhuta sees potential for non-Gulf ports to handle more volume, although he notes it takes time to build supply chains with the needed trucking and packaging capacity.

And labor challenges remain within the plants and among the ranks of drivers delivering the goods, Bhuta said. The weeding out of workers due to failed drug tests and the jockeying of those who pass for higher salaries have given foreign-based producers a crash course in US wage inflation. Trucking operators face similar challenges in securing skilled drivers, with the added sting of investing in a heavy equipment permit only to lose it when a driver leaves for a higher salary.

Rather than just hiking salaries, producers and trucking companies are deploying a “soft touch” of benefits to mitigate the often volatile labor market, Bhuta said. Producers are looking at new ways to transport resins, including using bulk truck and bulk ocean shipping, with packaging done closer to point of origin.

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