China Wields Commodities Leverage with LNG and Tungsten Tariffs
Bloomberg News
5 min read
(Bloomberg) -- Liquefied natural gas and tungsten — a metal used in the defense and energy industries — are the commodities on the front lines of the opening salvo of the US-China trade war.
President Donald Trump pulled the trigger on a blanket 10% tariff on all Chinese imports on Tuesday, prompting Beijing to hit back, albeit with relatively targeted measures. In the raw materials space, that included export controls on tungsten, as well as other minor metals such as molybdenum and tellurium, a 15% import levy on LNG and coal and a 10% duty on oil and agricultural equipment.
Commodities flow mainly from the US to China, with hardly any moving in the opposite direction. Here’s a look at some of the initial impacts on raw materials from the trade war.
LNG, Coal
The US is the biggest exporter of LNG and China is the biggest importer, setting the stage for a major re-routing of global flows and increased inefficiencies. Chinese LNG buyers will now think twice about signing another long-term contract with a US project. Instead, they may turn to other suppliers like Qatar or Australia.
China imported 6% of its LNG last year, according to ship-tracking data, and that’s likely to drop as buyers in Asia’s largest economy look to offload cargoes to other markets, especially Europe where prices are higher due to supplies of Russian gas being cut off. Beijing has targeted American LNG before, imposing tariffs in 2018 during Trump’s first term.
“Chinese buyers will take advantage of the destination flexibility of US LNG contracts and seek to resell contracted volumes elsewhere without tariffs,” said Saul Kavonic, an energy analyst at MST Marquee.
The US supplied 3% of China’s thermal and coking coal imports last year, but the Asian nation would be easily able to turn to alternative suppliers — both at home and abroad — to fill that gap.
Tungsten, Other Metals
The five niche metals China put export controls on are used in the electronics, automotive, energy, aerospace and defense industries. Beijing’s more calibrated response shows its focusing on areas where it has the most leverage. China produces about 80% of the world’s tungsten, and is the main supplier of the other materials at well.
Tungsten is known for its remarkable density and high melting point and goes into armor-piercing missiles, while tungsten wire is used to slice silicon ingots into wafers for semiconductors and solar panels.
“The escalation of export controls on critical materials from China shouldn’t come as a surprise,” said Jessica Fung, head of consulting at Project Blue. “The difference this time is that these materials also impact the consumer goods and energy sectors, so it’s less singularly focused on semiconductors and defense applications like the last round.”
China has held off from imposing tariffs on any metal imports from the US, although these flows are fairly limited. Copper is the one area where there is a significant trade. Around 40% of US copper scrap exports and 16% of concentrates shipments go to China, Macquarie analysts led by Marcus Garvey said in a note. When Trump introduced tariffs in his first term, China responded by imposing a 30% levy on US copper scrap.
Oil
China shipped in about 910,000 tons of US crude in December, according to Chinese customs data, or around 6.8 million barrels. That amounts to around 2% of the Asian country’s overall imports, and while that’s not much it may have become relatively more important this year due to Washington’s curbs on Russian energy and the prospect it could restrict Iranian flows.
American oil exports are generally lighter, sweeter grades, and Chinese buyers including Sinopec may be forced to seek more of those types of varieties from the Middle East.
Agriculture
Beijing targeted tractors and agricultural machinery from the US, but refrained from imposing any levies against crops themselves. That leaves room for China to use them as a lever in the future, potentially boosting purchases as a sign of goodwill if relations improve and, given grains prices are fairly low, it would be a good time to do this.
China has cut its reliance on American food and animal feed since Trump’s first term, diversifying away from Western suppliers, curbing any pressure to act in the near term. Still, some $10 billion or more of US agricultural exports are under threat from a trade war, Bloomberg Intelligence analysts wrote ahead of the tariff announcement. In Trump’s first term, soybean exports to China slumped to about $3 billion in 2018 from $14 billion two years earlier.
On the Wire
The first volleys in the latest US-China trade war made clear that Xi Jinping is taking a more cautious approach than during Donald Trump’s first term.
China posted a record $1.3 billion in box office receipts over the week-long Lunar New Year holiday period, suggesting efforts by Chinese officials to boost consumer spending are working.
China put export controls on tungsten and other niche metals used in the electronics, aviation and defense industries as it retaliated in a targeted way to US tariffs.
This Week’s Diary
Wednesday, Feb. 5:
Chinese domestic markets reopen after Lunar New Year holidays
Caixin China services, composite PMIs for January
Thursday, Feb. 6:
No major events scheduled
Friday, Feb. 7:
China foreign reserves for January, including gold
China weekly iron ore port stockpiles
Shanghai exchange weekly commodities inventory, ~3:30 p.m. local time
Saturday, Feb. 8:
No major events scheduled
Sunday, Feb. 9:
China Consumer Price Index and Producer Price Index
--With assistance from Megan Durisin, Serene Cheong and Katharine Gemmell.
