China Might Not Buy American Oil. So What?
China’s searching the world for commodities they can buy outside of the U.S. For soybeans, the obvious market is Brazil, as it always was, always will be. For oil, it runs the gambit, but it’s probably not going to be the U.S. once China retaliates for President Trump’s push for 10% tariffs on all China exports starting Sept. 1.
If China stopped buying U.S. crude, like it basically stopped buying American soybeans, what’s the problem? As Jim Cramer said this week on CNBC, “you know what? Go pound sand, China.”
That may be a bit radical. China is a huge market. American companies love being there and those who are not there would love to sell to them.
But assuming China goes after U.S. oil and gas, as it has done in the past, then what happens to the U.S.’s China oil market?
So far oil has avoided China tariffs, but it’s safe to assume that they would be the target of higher duties as they have been in the past.
Even without tariffs, Beijing might request that national oil companies including Petrochina and Sinopec cut their purchases from the U.S. as part of a series of non-tariff barriers, says Chris Rogers, research analyst at Panjiva, the supply chain research unit of S&P Global Market Intelligence.
That may prove to be a challenge, Rogers thinks, given Chinese demand for crude oil has been increasing. Panjiva analysis of official data shows that China imports of crude oil climbed 13.9% year over year in tonnage terms in July after a 9.5% increase in the second quarter.
“The impact of the action will likely be minor,” Rogers says. “Crude oil is a largely fungible commodity globally so U.S. supplies will simply head elsewhere.”
Panjiva data shows exports to China had already fallen by 49.2% year over year in the second quarter, accounting for just 6.8% of the total in the second quarter anyway.
That shortfall has been made up for with additional shipments to the EU, which rose 28.9% and represented 25.1% of the total, as well as Canada, up 48.2% to reach 15.2% of the total, based on Panjiva research.
U.S. crude oil exports in total are up nearly 50% over a 12 month period anyway, and reached a new record in June. Any Chinese shift in demand may simply be a matter of a lost opportunity rather than a loss of existing business.
Worth noting, however, many analysts in the soy trade thought that the U.S. would simply divert soy tonnage over to Europe as Brazil used its European soy and sold it to China instead. That all depends on a number of factors, such as the type of soy — whether it is non-GMO matters for some markets in Europe — and timing. Brazil and U.S. crop cycles are opposite each other.
Instead, Brazilian farmers planted more soy in anticipation for Chinese demand. U.S. soy did not find a new home.
Most investment firms are hedging on 25% tariffs coming after the 10% hit in September, giving China the incentive to retaliate.
“Our baseline envisages a further escalation with the 10% tariff rate eventually rising to 25% by end-2019. With tensions spilling over from trade to tech to currency,” says Rob Subbaraman, head of global macro research at Nomura.
Nomura sees the Chinese yuan weakening from 7.04 currently to 7.20 by the end of the third quarter and and 7.35 by the end of the year.
China’s economy is likely to weaken further and Asian economies risk facing tighter financial conditions due to capital outflows.