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Insight | Time: Aug 8 2018 10:30AM
How will additional tariff on $60 billion worth of US goods influence viscose industry?
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In response to the United States' decision to raise tariffs on $200 billion worth of Chinese imports, the Customs Tariff Commission of the State Council decided on Aug 3 to impose additional tariffs at four different rates (25%, 20%, 10 % and 5%) on $60 billion worth of products imported from the United States. The timing of the implementation of the new tariffs is to be confirmed.

It is hard to evaluate the influence in the short term since the tariffs have not come into effect, but it will definitely arouse worries over China's import from the US. It is foreseeable that Chinese buyers will try to reduce the procurement of US goods when they have other options. The impact on viscose industry chain is mainly reflected in VSF and dissolving pulp.

The applicable tariff of viscose fiber is announced at 25%. According to customs data, China imported 16.2kt of VSF (under H.S. code: 55041090, 55041029 and 55049000) from the US in 2017, taking up 7.83% of total imports. As we know, only Lenzing Group has a Lyocell fiber plant in the US that mainly produces type G100 Lyocell fiber, using Tencel™ brand.

Neither sellers nor buyers are unable to afford the tariff of 25%, but fortunately, Lenzing group owns the advantage of global distribution. When we had an interview with Mr. Hu Jian-Senior Vice President North Asia Lenzing AG in May, we had discussion about trade war. Mr. Hu said that the impact of China-US trade on Lenzing Group is limited, owing to the company's advantage of global distribution. It seems to be true at present. Lyocell capacity in the US is just around 40kt/yr while that in Austria is more than 100kt/yr. Moreover, Austria has extremely large market share in Turkey and Indonesia besides China. If the 25% tariff starts to be levied, Lenzing can increase the exports from Austria to China while US goods can be sold to the markets outside of China. Compared with the 25% tariff, it is worth of taking time and cost.

Adding $50 billion worth of imports before, China plans to impose additional tariffs on $110 billion worth of products imported from the United States. China's imports from the US is valued at $130.4 billion in 2017, so most products are included in the scope that tariff will be levied. However, dissolving pulp among the list is levied at the lowest tariff of 5%. It can be seen that China does not reject resource-based products too much. In 2017, China imports 312,187 tons of dissolving pulp from the US, taking up 11.99% of total imports and US ranks the third place among all of origins. The imports from US focus on acetate pulp and softwood pulp, occupying small proportion in dissolving pulp.

Unlike VSF, the 5% tariff is acceptable by the market. Disregarding specific application of acetate pulp, there are only three major softwood pulp suppliers at present and one of which is in the US. We can think about the responses of each party if the 5% tariff is published. Softwood dissolving pulp supply is generally tight and let us suppose that rational price of dissolving pulp is at $100/mt. When tariff starts to be levied, suppliers outside of the US will probably raise prices to $101-102/mt, which is a mild increase. However, US dissolving pulp mills have to make a concession in order to keep competitive, like cutting price to $98/mt. Therefore, Chinese buyers have to pay 98*1.05=$102.9/mt for US pulp, just $0.9/mt higher than non-US pulp. The slightly higher price will be accepted amid short availability, but it is just a hypothesis.

We do not think that changing flow direction is the major choice of dissolving pulp because cost invested in it may not be covered by the 5% tariff. Unlike VSF downstream sector, there are not many viscose fiber companies outside of China, so it is difficult for dissolving pulp mills to find new customers.

It is noteworthy that besides H.S. code: 47020000, pulp listed under other codes is also applied in viscose fiber production on small quantity, which will face the same problem.

From the aspect of industry, China-US trade war injuries both Chinese and US enterprises. Each company, especially US ones can strive for more peaceful trading environment, which cannot be decided by one company. When striving for fair trade, they have to respond to possible trade war ahead of time.
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