Friday, June 22, 2018

The Rippling Effects of the 232 Tariff

Jim Venhoff, Manager, Agriculture & Biofuels
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. 
Genscape Detected Shutdowns.PNG
Total number of ethanol plant shutdowns in 2018 to date as reported by Genscape’s Ethanol Production Monitor indicating lower production in April 2018. Click to enlarge
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.

Genscape Monitored Inventory
Snapshot of Genscape’s Louisiana Ethanol Inventory Report showing major withdraw from the region in March. Click to enlarge
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.

Chemroute Sky
Picture of the Chemroute Sky on April 5, 2018. According to Genscape’s Ethanol Exports Monitor, the vessel was in the process of receiving ethanol from Oiltanking-Texas City. This was one of many vessels that held ethanol from PADD 3 heading to Brazil. Click to enlarge


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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