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On 15 January 2020, President Trump and Chinese Vice
Premier He signed the highly anticipated "phase-one" trade
agreement between the US and China.
China agreed to purchase, over two years, $200 billion of
goods.
$162.4 billion of goods ($32B in agriculture, $52.4B in energy,
$77.7B in manufacturing) above the 2017 level ($130B).
$37.9 billion in services from US companies over the two years,
above the 2017 level ($56B).
After the Phase One trade deal, much of the focus in the dry
market is now on China's agricultural and energy purchase
commitments built into the deal.
For agriculture, China has committed to buying additional
purchases of US agriculture products, $32 billion over two years,
which specified $12.5 billion above the 2017 baseline of $24
billion for a total of $36.5 billion in 2020.
The deal did not specify the exact amount of each commodity, but
the historical market share of soybean indicates China will meet
the commitments with a significantly larger purchase of soybean:
according to IHS Markit Global Trade Atlas,
China bought $12 billion US dollars of soybean (31.6 million
tonnes), a half of the total agricultural product purchase from the
US in 2017.
After the deal, IHS Markit increased its forecast of China's
2019/20 imports to 91 million tonnes and raised its 2020/21 China
soybean import forecast to 95 million tonnes.
However, owing to the development of African swine fever, China
has a limited soybean demand growth, which may lead China to reduce
Brazilian soybean purchases to keep the US-China phase one
commitments in 2020-21.
For energy, China will also purchase at least $52.4 billion in
energy over the two years, from a baseline of $9.1 billion in
2017.
In our view, even though crude oil imports will play a major
role for China to achieve the pledged target of energy imports in
the "phase-one" trade deal, coal can also play some role to meet
the commitment. After the deal, IHS Markit expects incremental US
coal exports, mostly coking coal, to China to be around 3-5 MMt
each year during 2020-21, adding at most $600 million of
incremental trade value.
However, US coal exports to China is not expected to jump
significantly in the coming months as the lack of cost
competitiveness in the Chinese market will limit the scale of
incremental thermal US coal imports.
We expect that China will first opt to cut imports of similar
quality coal from other countries, specifically, Australian or
Mongolian to make room for more US coking coal.
According to IHS Markit Commodities at Sea,
the US exported more coking coal than thermal coal to China over
the last three years, and this trend is expected to continue in the
next two years.
There is still a high potential risk, as the deal size looks
quite ambitious and China may not make the sizeable purchases until
November 2020 (US presidential election) when there will be a clear
view of who is going to take office.
Posted 24 January 2020 by Daejin Lee, Consulting Principal, Maritime & Trade, IHS Markit
