Why Phase One Trade Deal Should Bring Relief To US Chemicals

The United States and China are expected to officially sign the “phase one” trade deal in Washington on Jan 15. This would mark a de-escalation to a roughly 19-month long fierce tariff war that has cost both economies billions of dollars.

The countries, last month, agreed to a phase one trade deal after months of negotiation on its terms. However, exact details of the detente between the world's two largest economies remain elusive.

The deal averted the implementation of a new round of U.S. tariffs on around $160 billion of consumer goods from China, which were slated to kick in on Dec 15. China has also reportedly suspended its additional tariffs on U.S. goods that were supposed to take effect that same day. Moreover, the United States will also slash its 15% tariff on about $120 billion of Chinese imports to 7.5%.

The agreement also includes China’s commitment to purchase a significant amount of U.S. farm, energy and manufactured goods and improve intellectual property rights protection. Per U.S. officials, China has agreed to purchase $200 billion worth of additional products from the United States over the next two years.

President Trump also recently said that the United States would start negotiation on the “phase two” trade deal right away. However, Trump hinted that he might wait until after the 2020 U.S. presidential elections to complete it.

U.S. Chemical Industry Bruised by Trade Tariffs

The chemical industry is among the industries that have been badly hit by the trade tariffs. The damaging effects of the trade war were evident from the industry’s lackluster performance in 2019. In particular, the U.S. chemical industry is caught in the crosshairs of the Sino-U.S. trade conflict.

Washington and Beijing have levied billions of dollars in punitive tariffs on each others’ products. China’s tariffs on American products include a wide swath of petrochemicals, specialty chemicals and plastics. The list includes chemicals such as polyethylene, polyvinyl chloride (“PVC") and polycarbonates.

The tariffs currently in place have already done significant harm to the U.S. chemical industry. China is among the most important trading partners of the American chemical industry and is one of the biggest export markets for U.S. chemicals. Beijing’s retaliatory tariffs have hurt U.S. chemical exports and the competitiveness of the American chemical industry.

According to the American Chemistry Council ("ACC"), a leading industry trade group, U.S. chemical makers procure several chemicals critical to their production processes from China that are not available anywhere else in the world. U.S. tariffs are affecting more than 1,500 chemicals and plastics imports from China worth $26.5 billion, per the trade group. Beijing’s tariffs have also hit more than 1,000 U.S. chemicals and plastics exports worth an estimated $11 billion.

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The ACC had earlier said that China’s tariffs on U.S. chemicals and plastics exports have put roughly 55,000 American jobs and $18 billion in domestic activity at risk as a result of lower demand for those products, which would lead to considerable losses for U.S. manufacturers.

It may be worth noting that China’s trade with the United States sank in 2019 in the wake of the U.S. tariffs. The country’s total imports from the United States dropped 20.9% year over year in 2019, per customs data release today. Chinese exports to the United States also contracted 12.5% year over year for the full year.

The U.S. chemical industry also saw a slowdown in chemical exports in 2019. Chemical exports declined in 2019 due to slowing global growth and trade tensions, per the ACC. The trade group, last month, said that it expects U.S. chemical exports to drop 2.5% to $137 billion for full-year 2019.

Trade issues and slower growth in several major chemical end-use markets also led to sluggish growth in U.S. chemical production in 2019. The ACC envisions domestic chemical production volumes (barring pharmaceuticals) to grow just 0.4% in 2020 after a paltry 0.6% rise in 2019.

Meanwhile, chemical makers are investing heavily on shale gas-linked projects to take advantage of abundant natural gas supplies. According to the ACC, 340 projects (including new plants and capacity expansions) have been already announced by the chemical industry since 2010 worth $204 billion. A significant portion of the investment is directed toward U.S. export markets including China.

However, the tariffs have raised concerns that chemicals companies would reconsider their investments in new projects, which could lead to a slowdown in growth in the American chemical industry.

Trade Deal Will be a Boon for US Chemicals

The completion of the initial U.S.-China trade pact will provide a much-needed relief for the reeling U.S. chemical industry. It would avert new tariffs on some of the U.S. chemicals and plastics not already covered by earlier rounds of tariffs.

The tariff war with the United States has largely contributed to the slowdown in the Chinese economy. While much around the trade dispute remains unresolved, the partial trade deal will remove clouds of uncertainties and improve outlook this year. It is likely to be a major step toward ending the bitter trade spat and would also pave the way for a more substantial phase two deal.

The phase one deal is likely to restore confidence in the Chinese economy, improve business and consumer sentiment and drive trade and investment activities in 2020. Notably, China’s exports rebounded in December after four months of consecutive declines as business sentiment improved following the announcement of the trade deal. Total Chinese exports went up 7.6% year over year in December while imports climbed 16.3% from a year ago, per customs data.

Easing U.S.-China tensions is expected to lead to an improved environment for chemical trade and an increase of Chinese imports of U.S.-made chemicals and plastics. This would provide a boost to American chemical exports and support the U.S. chemical industry’s growth this year.

Chemical Stocks to Watch for

A few stocks currently worth considering in the chemical space are Daqo New Energy Corp. (NYSE:DQ) , Lithium Americas Corp. (TSX:LAC) , Akzo Nobel N.V. (OTC:AKZOY) , PolyOne Corporation (NYSE:POL) and Arkema S.A. (OTC:ARKAY) .

Daqo New Energy sports a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 315.4% for 2020. The Zacks Consensus Estimate for 2020 earnings have been revised 5.6% upward over the last 60 days. You can see Zacks Investment Research