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Analysis: China’s US propane tax plans add uncertainty

04 Apr 2018 14:03 (+01:00 GMT)
Analysis: China's US propane tax plans add uncertainty

Singapore, 4 April (Argus) — China's plans to impose a 25pc import tax on US propane are likely to pressure demand for US LPG, but the immediate market impact has been limited amid uncertainty over when or whether the new taxes will be implemented.

China's finance ministry today announced the plans for the new tariffs, shortly after the US Trade Representative's office published a list of Chinese import items it wants to tax at a higher rate following a directive from President Donald Trump last month. Beijing has identified 106 US products for the new 25pc tax, including propane.

China currently imposes only a 1pc import tax on LPG from all sources, indicating a 25pc tariff on US shipments could have a significant impact on trade flows.

China has not announced when the import tariffs will come into effect. The move is a response to the latest proposed US tariffs, which are unlikely to be implemented until late May, after a public consultation period is completed. This suggests it could be around two months before the new taxes actually take effect, leaving time for Washington and Beijing to potentially negotiate a settlement.

This has left most market participants uncertain of the potential impact, if any, on US propane exports to the country. The latest announcement is a "paper tiger" meant as a scare tactic, one Chinese importer said.

Others were less sure. An east China importer said the tariffs could have a big impact on term supply deals in particular, while spot cargoes may be less affected because they could be diverted through third countries. But Chinese importers may choose look to alternative exporters such as the Mideast Gulf, Australia and west Africa for spot supplies to avoid the impact of the duties completely, other market participants said.

Chinese buyers "will refuse to take US propane as much as possible, and those with US tonnes could be looking to do a physical swap for other origins," said a trader.

The US exported 3.37mn t of propane to China last year. This accounted for 25pc of China's total propane imports of 13.35mn t, according to Chinese customs data. Propane from the Mideast Gulf – comprising Saudi Arabia, Qatar, UAE, Kuwait, Iran, and Bahrain – made up 60pc of the total.

There are also concerns over whether Chinese importers could default on their long-term US contracts, as buyers are expected to bear the cost of the import tariffs under a cfr contract, said a broker.

"Sellers do not have the obligation to pay the import tax usually, as they would typically sell to a tax-free zone storage," added the trader.

"If it is implemented, there will be no winners in this trade war," a second Chinese importer.

But the immediate impact on spot LPG prices in Asia-Pacific was muted. Spot prices of propane delivered to south and east China fell by $7/t on the day to $464/t and $465/t respectively, hit by weaker crude.