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Impact of the US-China trade war on the MDI market
23 August 2019James Elliott
The polymeric methyl diphenyl diisocyanate (pMDI) market has
been impacted by the latestdevelopments in the United States-China
trade war. pMDI, a key polyurethane feedstock, was initially
included in the list of $200 billion of Chinese imports that were
tariffed by the United States Trade Representative in response to
China's trade practices. US pMDI imports from China were subject to
a 10% import tariff beginning September 24, 2018. This rate was
subsequently increased to 25% on May 10.
The main polyurethane feedstocks - including pMDI, monomeric
methyl diphenyl diisocyanate (mMDI), toluene diisocyanate (TDI),
and polyether polyols (produced via the intermediate propylene
oxide) - are reacted in different combinations to produce
polyurethanes. The most common product is flexible and rigid
polyurethane foam.
Polyurethanes are used in a myriad of applications. The
buildings we live in, the mattresses we sleep on, and the shoes we
wear can all contain polyurethanes. Even surfboards are made from
rigid polyurethane foam. Polyurethanes are everywhere.
The global pMDI market has been volatile lately. In 2017, supply
shortages triggered by plant outages and insufficient capacity
investment led to a pMDI price surge. Prices collapsed in the
second half of 2018, as supply significantly improved and demand
waned amid product substitution and the cooling global economy. In
late-Q1 2019, the pMDI market picked up with reinvigorated demand
thanks to the peak spring construction season.
However, the escalation in the US-China trade war and
implementation of the 25% trade tariff will impact global pMDI
demand growth and in the United States. Slower global economic
growth is now forecasted. One upshot is a weaker outlook in
construction activity, including in the United States, moderating
growth in building insulation demand; the largest pMDI end use in
the United States is in rigid polyurethane and polyisocyanurate
foam based insulation. In general, IHS Markit forecasts softer pMDI
demand growth compared to the healthy growth exhibited in recent
years. Weakness in other sectors such as the automotive industry -
an industry facing its own challenges - is also projected to stifle
US pMDI demand growth.
The United States, the second largest pMDI-consuming country,
has seen its pMDI trade position shift in recent years.
Historically, the US was a net exporter of pMDI. Today the country
still exports a substantial volume of pMDI, including more than
200,000 metric tons (mt) in 2018.
The US pMDI market has recently exhibited high demand growth
rates. Yet there has not been a major greenfield MDI capacity
investment in the United States for many years. As the US import
requirement grew and the pMDI market structurally tightened, the US
became a net importer of pMDI in 2018.
Subsequently, the US market has become dependent on imports to
meet demand. Approximately 71% of the 300,000 mt of pMDI imported
into the US was sourced from China. Based on IHS Markit's US pMDI
monthly index and the monthly import volume, this equates to just
under $500 million worth of imports.
The introduction of the 25% tariff will ensure that volatility
continues in the pMDI market, especially in the US. US pMDI prices
are forecast to rise not just because the tariff increase, but also
because Chinese supply is expected to moderate as exporters reduce
US shipments.
The United States trade position will rebalance. pMDI imports
will decrease in 2019. Exports are also projected to drop as more
domestically produced material remains in the US market to meet the
deficit arising from reduced Chinese supply. Agreed contractual
volumes will continue to flow from China to the United States. In
such circumstances, pMDI consumers will face rising prices where
contracts allow. The impact a trade rebalance will have on the
market is one factor amongst others contributing to upward price
momentum anticipated in the second half of 2019. It is unlikely
direct long-term supply shortages will be experienced due to the
consequences of the tariff introduction. Instead major end users in
the construction, appliance and wood composite industries will not
have to moderate end use production, rather face higher
polyurethane material costs.
Other polyurethane feedstocks are also impacted by the US-China
trade war. The US implemented the 25% tariff on TDI and propylene
oxide. On May 13, China applied retaliatory tariffs of 25% on pMDI,
mMDI, and TDI as well as a 10% tariff on propylene oxide.
IHS Markit launched its new
Global Polyurethane Feedstocks Market Advisory Service in
March. This service helps clients navigate pricing, supply, and
demand volatility in the polyurethane feedstocks markets. It also
provides deep insight into the latest market developments, such as
the impact of the US-China trade war on the polyurethane feedstocks
markets.
Posted 23 August 2019 by James Elliott, Associate Director, IHS Markit
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