Trump’s China tariffs give relief to Saudi petrochems

• Tariffs have domino effect on Japan
• Propane price fall is a boon
• Margins improve for producers

Saudi Arabia’s beleaguered petrochemicals industry, especially those that rely on propane gas to make their products, has received some welcome relief from an unexpected source: President Donald Trump and his trade tariffs on China.

Trump’s first notable tariff moves against China – the world’s largest importer of propane – came in February. Beijing, which had been getting 60 percent of its supplies of the gas from the US, retaliated with a 15 percent tariff on fossil fuel imports from the US.

As a result, the propane imports all but ceased, spurring US exporters to sell their gas to Japan instead. That, in turn, caused propane prices in Japan to tumble.

The price that Saudi Arabian petrochemical companies pay for their propane – an input for several petchem products such as propylene and polypropylene – is linked to Japanese propane market prices.

So the decline in Japanese propane prices widened the margins for propane-based petrochemical products, says Yousef Husseini, director of chemical equity research at Cairo-based Middle East investment bank EFG Hermes.

“Most Saudi producers use propane to varying degrees,” says Husseini. “Margins on many propane-based products have improved from trough margins to mid-cycle.”

Saudi Arabian beneficiaries

The chief beneficiary in Saudi Arabia of the fall in propane prices was Advanced Petrochemical Company, whose sole feedstock is the gas.

The company was one of the very few Saudi petrochemical producers to report a year-on-year improvement in its quarterly earnings, making a first-quarter profit of $19 million versus a loss of just over $16 million in the year earlier period. 

Most others reported lower profits or even losses; Saudi Basic Industries, the country’s largest petchem producer, lost nearly $333 million in the three months to March 31, compared with the same period last year.

Lower propane prices could continue to give some support to earnings but that depends on the dislocation in trade continuing, Husseini says.  

Sadly for Saudi petchem producers the benefits will probably prove short-lived after the US and China agreed last week to lower duties to 10 percent. “It’s a short-term tactical boost for the sector,” says Husseini.

China’s propane shortage has also limited its output of the likes of propylene and polypropylene, though these can also be made from coal and oil.

Coal- and oil-based production is unaffected, but propane drives about a fifth of Chinese polypropylene production, Husseini estimates.

“The extent of the impact is unclear because Chinese data lags, but anecdotally people on the ground are talking about companies either reducing utilisation [of manufacturing plants] or bringing forward planned shutdowns for maintenance,” says Husseini.

“We’re not necessarily seeing a big increase in polypropylene prices, rather these are not correcting as much as other products.”

Impact on sulphur

Trump’s tariffs are also having an impact on the trade in sulphur. Sulphur is an ingredient in making Diammonium phosphate or DAP. It is a widely used phosphate fertiliser used in agriculture, as well as a chemical product used in industry.

The US had imported most of its sulphur from Canada in molten form but has started sourcing much of its supplies of the element from Asia, Africa and the Middle East, on which US tariffs are lower.

• Oil profit fall at Oman’s OQ suggests bigger decline in Q2
• Jordan caught under Trump tariffs’ sword of Damocles
• Ma’aden to invest billions after profit surge

With Canada’s trickier to transport molten sulphur supplies now lying idle, the price of some sulphur-based products has increased.

DAP fertiliser is trading at a three-year high of $653 per tonne, up 12 percent since late March.

Saudi Arabian Mining Company, or Ma’aden, is a big producer of DAP and so has benefited from this higher price, says Husseini. 

State-controlled Ma’aden, the kingdom’s largest mining and metals enterprise by market capitalisation, sold SAR4.5 billion ($1.2 billion) of phosphate goods in the first quarter. That was more than half its total sales of SAR8.5 billion for the same period.