China's plastic response: Second order effect of POM-C anti-dumping probe

As the developed markets have kicked off the process of containing the strong deflation in China by introducing a tariff war, it seems that China has decided to respond with a bit more than deepening subsidies. This week China has started it's counter to US tariffs and I believe we would keep hearing seperate responses as they are formulated through the coming weeks. In general the basic principle of formulating response in trade wars is based on mirroring and ensuring the tariffs imposed by one side does not significantly change the balance of trade very quickly. China is already facing structural overcapacity in a number of sectors and the incentive structures in Chinese political system is set up to keep fueling the production capacity as such there is no practical way to stop the goods printing tap for now. Thus, Inorder to ensure that the bipartisan support of the US electorate does not focus all it's energies on containing the proliferation of the deflation, China has had to convert the market risk of it's US treasury holdings to partially put a roof on appreciation of the currency and primariliy to nationalize it's real estate sector to ensure public money can be used to socialize the losses from speculative overbuilding and to build up strategic reserves of metals as it seems for now. In my opinion, China anticipates that the current veiled threats from Latin American markets to push back on Chinese imports would materialize soon as well. Having this picture in mind, China has put it's first mirror forward and the Ministry of Commerce has announced this week that it would begin anti dumping investigations on polyoxymethylene copolymer imports from US, EU, Taiwan and Japan.

In general, I expected a more comprehensive list of products to be included in the first response which would cut deeper into the balance of trade between the US and allies with China but it seems that there is immense political pressure to come up with very quick responses. China's petrochemical lobby seems to have cashed in it's first chips to hint that the plastic input to the automobile industry and the electronics industry should be fed from the domestic production capacity. Polyoxymethylene copolymer, happens to be a pretty versatile theroplastic that is actually all around our cars as door handles, in gear sticks, partially in seat belts. From zippers in our jackets to casing of a large number of electronic items like electronic toothbrushes, POM-C has a wide spectrum of presence. Having that understanding with us, let's try to understand the second order effect of the first anti-dumping probe that China has started on polyoxymethylene (POM) copolymer.

The global POM-C market is of around 1.4 million metric tons in 2023 and considering the inflation of 2022-2023, flows to china has actually been healthy as the demand for further value added goods in the developed markets has supported it. In 2023, China has approximately imported 250,000 metric tons of POM but the exact split between the copolymer and homopolymer variant is not clearly known. The price of polyoxymethylene copolymer (POM-C) imported by China in 2023 varied but was generally around $3,237 to $3,431 per metric ton which would put the notional value of the import market approximately at 8 billion USD. To put this number in context the notional value of the import market is around 18.60% of the recent fund earmarked to nationalize the chinese housing market. So the value of the import to China is not negligible and the current overcapacity can definitely capture and captivate a good portion of the import market. Considering the current capacity buildout of the plastic end or medium value addition products in APAC, China should have more than enough capacity to start a downward price spiral on this market domenstically. In the world of manufacturing, capacity matters a lot more than intent. It takes decades to build capacity and years to refit with deflation support from the government.

Though it is very difficult to estimate the exact POM-C imported from different countries of origin, in my estimation from public information the split of the market from country of origin is approximately as follows:

In my opinion the results of the anti-dumping probe would come up with flying political colours irrespective of the rationality of balance of trade. Thus considering a strong tariff to be coming up on POM imports to China, let's try to understand the second order effects of the POM exports from the leading exporter being non-competitive in China.

The German industrial complex is built to capture as much value from any good that leaves it's border as possible, as such the base chemicals industry forms a very important pillar of the German value chain but considering the last few years, the chemicals industry in Germany has not been able to fire on all cylinders primarily due to downstream effects of the demand of high value added goods and overall macro instability. That might sound vague but over the last few years the German chemicals industry has faced a multivarite set of headwinds which deserves a article on it's own. Coming back to POMs, in my estimation, Germany has exported around 76,000 MT of POM-C to China in 2023 and the notional value of the export can be considered to be around 246 million USD. POM export to APAC is expected to not have yielded great margins in 2023 considering the supply pressure that has been building up for a while. The primary suppliers impacted from a probable tariff on POM-C would be R?chling Group, Celanese Corporation, GEHR Plastics and a few others. Considering the structure of the German industrial value chain this would cut deeper as this has downstream effects on the demand for Formaldehyde in German domestic market as it happens to be the primary raw material to produce POMs. The unsung hero of the German industrial complex, BASF happens to be largest manufacturer of Formaldehyde in Germany followed by Celanese and Ineos. It is to note that the primary consumption of Formaldehyde in the domestic German market is in adhesives and not in POMs but considering overall consumer sentiment this would definitely have implications on the German chemical industrial complex. The primary raw material used to produce formaldehyde happens to be methanol which by undergoing oxidation transforms to formaldehyde. BASF happens to control majority of the domestic market in Germany in terms of both formaldehyde and methanol as such the imports from neighbouring producers in Netherlands may experience exercise of underpurchase optionalities if they exist. This would not produce any material under utilisation of the chemical processing capacity in Germany than it already is. This might be a good time to start considering supporting retrofit of ships to consume methanol as a fuel. It is always the right time to re-direct products to points of consumption that yield the most intended results.