Jim Venhoff, Manager, Agriculture & Biofuels
June 15, 2018
June 15, 2018
On
March 23, 2018 President Trump’s new tariffs on U.S. steel and aluminum
imports went live, creating a ripple effect on other commodity markets
across the globe. In response, several other countries announced
retaliatory tariffs of their own on critical American exports including
pork products, metals, and even bourbon. With the May 31 exemption
deadline now two weeks in the rear view, the impact on one critical US
export, ethanol, is yet to be seen. China already imposed an additional
15 percent tariff on U.S. ethanol, which may pave the way for other
major commodity destinations to follow suit. Brazil and Canada alone
account for 57 percent of all 2017 ethanol exports, so a retaliatory
response in one of these critical regions may have global impact.
Section 232 Tariff Background
The Trade Expansion Act of 1962 provides the construct for crafting
international trade agreements with specific U.S. industries and impacts
in mind. Section 232 gives the President authority to make changes to
trade arrangements in the interest of national security once significant
evidence presents a risk or threatening impact. In the case of the 2018
tariffs, the U.S. Commerce Department conducted an investigation and
submitted a report asserting steel and aluminum imports “threaten to
impair the national security as defined in Section 232.” The report
concluded "the present quantities and circumstance of steel imports are
'weakening our internal economy' and threaten to impair the national
security.” This little-known piece of legislation was only initiated
twice in U.S history, in 1979 to place a tariff on Iranian oil imports
and then in 1982 to halt crude imports. The recent initiation places a
25 percent tariff on imported steel and a 10 percent tariff on imported
aluminum.
After the initial roll-out, countries such as Mexico, Canada, and the
European Union were given temporary exemptions through May 31, 2018.
Other countries, such as Brazil, chose to accept import limits to avoid
the tariffs.
Domestic Ethanol Supply and Demand
The tariff’s impact on domestic ethanol supply is unknown at the
moment. After the President’s office announced the tariff in late March,
ethanol production remained steady with production averaging around
1,040,000 barrels per day (bpd) according to Energy Information
Administration’s (EIA) Weekly U.S. Oxygenate Plant Production of Fuel
Ethanol Report. In mid-April, production slowed, reaching 985,000 bpd
before rebounding in late-April and early-May. Genscape's Ethanol Production Monitor,
which monitors ethanol plant shutdowns across the U.S. in real-time,
revealed the same trend, however, the production slowdown during this
time may not necessarily indicate a change due to the tariffs.
Historically, the last four years show a similar April ethanol
production slowdown. Genscape also saw large storage net withdraws in
March in Chicago, New York Harbor, and especially Louisiana according
to Genscape's Ethanol Inventory reports.
The market responded and inventory prices dropped after the withdraws,
which happened around the same time the tariffs were introduced.
This year, extremely large amounts of ethanol left the U.S. from
February through April, primarily due to Brazilian exports, the majority
of which came from the Gulf Coast. Record volumes may imply that
additional tariffs could eventually come from countries that the U.S.
exports to. Ethanol Exports Monitor, a
report that collects daily-level storage changes and detects ethanol
vessel loading events in the Gulf Coast, currently shows a drop-off in
exported volumes expected in May. The report also shows there was a rush
of ethanol shipments into China just prior to the tariffs levy.
Outlook
Prior to the 232 tariff action, China already had a 30 percent tariff
on U.S. ethanol imports and added an additional 15 percent as a tariff
response. The late 2017 arbitrage window opening further strained the
ethanol import opportunity in China, adding to a volatile trade
relationship. While the tariff is active, Genscape expects the arbitrage
window for U.S. ethanol exports to China to be firmly shut. China will
likely look to Central and South America for ethanol imports out of
necessity. In 2017, the Chinese government announced a nationwide
ethanol mandate, which requires the entire country to use E10 by 2020.
While there are other ethanol suppliers, it’s unlikely China will meet
this mandate without importing ethanol or corn from the U.S.
The arbitrage window in Brazil is currently open, for how long is the
question. Brazil accepted a hard quota to avoid the tariff on steel
imports. Brazil is the second-largest exporter of steel to the U.S., so
if any issues arise with the quota, Brazil may impose additional tariffs
on ethanol. Since Brazil is the top ethanol destination since 2017,
this could choke the export chain. Brazil currently has a 20 percent
tariff on U.S. ethanol imports that exceed a 600 million liter rate
quota. Since ethanol prices remain low for 2018, U.S. ethanol imports
remain active in Brazil as evidenced by record-level imports in the last
three months.
No new retaliatory tariffs were issued since exemptions ended in May.
Canada and Brazil are on watch as the top ethanol importers, and
Genscape intends to monitor further tariff implications to gauge market
impact. Our Ethanol Supply Chain Services
proprietary monitoring technology provides weekly measurements of
inventory levels at key U.S. storage hubs as well as daily gas
nomination data for ethanol facilities. The service offers a full
holistic view to market participants to gain a complete understanding of
the U.S. ethanol supply chain and make more strategic decisions. To
receive the latest information on U.S. ethanol production, storage, and
exports, please click here to learn more about Genscape's Ethanol Supply Chain Services.
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