Ignore or enforce? Biden’s dilemma on China’s commodity purchases

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(The opinions expressed here are those of the author, Clyde Russell, a columnist for Reuters.)

President Joe Biden inherits a problematic trade deal with China and the unpalatable choices of trying to make Beijing meet its commitments on purchases of US commodities, renegotiating, or simply ignoring China’s failure to meet the terms.

The so-called Phase 1 trade agreement, signed in January last year between the administrations of former President Donald Trump and President Xi Jinping, was most likely doomed to fail from the start.

The deal committed China to buy unrealistic volumes of US commodities, most notably energy products such as crude oil, liquefied natural gas (LNG) and coal, as well as agricultural output such as soybeans.

China imported a record volume of US LNG in December, with Refinitiv estimating 1.04 million tonnes of the super-chilled fuel arrived on 15 vessels

Exact figures aren’t available, but China probably purchased less than one-third the value of the target in energy, and little more than half of agricultural commodities.

Beijing committed to buy energy over and above a $9.1 billion baseline of US imports in 2017, with a split of an extra $18.5 billion in 2020 and $33.9 billion in 2021, as well as some $36.5 billion in agricultural commodities annually.

While calculating the exact value of what China paid for US commodities in 2020 is challenging, it’s easier to make estimations based on data for the volumes of imports.

China imported 394,000 barrels per day (bpd) of US crude oil in 2020, triple the volume of the previous year, according to official data.

Much of this was concentrated in the second half of 2020, with December arrivals of around 848,000 bpd, which would be a record high according to Refinitiv data.

But even this volume of crude would be inadequate to meet the terms of the Trump trade deal.

December-arriving crude was most likely purchased in October, at a time when benchmark US West Texas Intermediate crude futures spent most of the month trading below $40 a barrel.

Assuming an upper end of the month’s price range of $40, the imports in December would have been valued at around $1.05 billion.

The price of WTI has since climbed and is currently around $53 a barrel.

Under the terms of the deal, energy imports were supposed to be $43 billion in 2021, meaning that at the current price of WTI, China would have to import roughly 2.2 million bpd for the whole of the year.

This is more than double December’s record volumes, showing the scale of the shortfall of China’s imports of US crude.

The above calculation assumes crude will make up all of the US energy exports to China, which is unlikely to be the case given Beijing can also buy LNG, coal and even oil products such as liquefied petroleum gas.

But the lion’s share would have to be met by crude, and even 80% of the target still amounts to about 1.78 million bpd.

If China were to try and buy that much oil from the United States, it would have a disruptive impact on the global markets.

In effect, WTI would have a constant bid, which would likely cause it to gain against similar light crudes, such as global benchmark Brent.

It would also crowd out some suppliers of light crude to China, forcing them to seek new markets, as well as making U.S. crude too expensive for buyers outside of China.

While U.S. oil producers may enjoy higher prices for WTI, they would also be exposing themselves to single buyer risk, something that is undesirable, especially if the buyer is a country with serious political and economic differences with your own.

LNG, coal

Can imports of LNG and coal help China meet its commitments on energy purchases? Short answer is yes, but not nearly by enough.

China imported a record volume of US LNG in December, with Refinitiv estimating 1.04 million tonnes of the super-chilled fuel arrived on 15 vessels.

China started buying US LNG again in April last year, having purchased none from April 2019 to March 2020, according to Refinitiv.

Estimating the purchase price is challenging, as December cargoes would have been bought at substantially cheaper prices than the current high spot price for delivery to north Asia.

Even assuming a generous $10 per million British thermal units, resulting in a cost per tonne of around $517, means December’s record LNG imports from the United States would be worth just over half a billion dollars.

This equates to about $6 billion a year, assuming record imports continue and the spot price averages a very bullish $10 per mmBtu.

China’s purchases of US coal have been dismal, although December did see 238,000 tonnes offloaded, the most since March 2019, according to Refinitiv.

Assuming this was coking coal, used to make steel, and not cheaper thermal coal, used in power plants, then the value of December’s imports would be around $33.3 million, assuming a price of about $140 a tonne.

It would take a massive increase in Chinese imports of US coal to make much of a contribution, and it’s highly unlikely that US miners would be able to produce and export the volumes required.

Overall, the current status of the Trump-China trade deal is that it is nowhere meeting the terms of the agreement, and has little prospect of doing so.

Biden will have numerous domestic and other challenges to deal with before he likely gets around to thinking about the agreement, which failed to reduce US imports from China and failed to boost commodity exports to agreed levels.

In the interim, it’s likely that China will purchase US commodities with more of an eye on whether they are price competitive and available, rather on whether they are meeting the terms of the deal with the Trump administration.

(Editing by Ana Nicolaci da Costa)

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