Commentary: April Fools! Who’s the loser in phase one?

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates. 

April Fools’ Day jokes span from the funny to the mean spirited. In the case of the Phase One trade deal the results are a joke but at the United States’ expense. Based on the movement of containers, cargo and tankers, China has been making “huge” purchases but not from the U.S.

China’s appetite for energy continues but not with the United States. Russia’s relationship with China has strengthened since the start of the trade war and shows no signs of weakening.  What validates this is the increase in the tons of oil purchases. According to Reuters, on March 25, China made a record purchase of 1.6 million tons of Russian oil. Traders told the wire service China was taking advantage of the collapsed oil price to beef up its strategic oil reserves. In January, Russia’s Urals supply to China surpassed 1.2 million tons. The United States is still waiting for that energetic bump in oil purchases from China.

The wait also continues for liquified natural gas (LNG) purchases. China is outpacing LNG buys with other countries and Russia.

(Photo credit: Flickr/Jens Schott Knudsen)

“Backloaded phase-one energy purchases and a long dispute process always meant Beijing could buy slowly and wait for U.S. political tea leaves in November,” explained Kevin Book, Managing Director of Research at ClearView Energy Partners, LLC. “If China did want to make good, low energy prices mean less compliance credit per cargo purchased, putting commodities that have retained more of their value ahead of energy.”

The recovery of the agriculture industry is a tale of the haves and have nots. U.S. soybeans are still more expensive than the competition, resulting in small purchases. “China’s Brazilian soybean demand is at a pre-African Swine Fever [ASF] level,” explained Jesper Buhl of BullPositions. “A full reversal of the sharp price premium on U.S. soybeans over Brazilian beans is not in sight.”

Buhl mentioned in his note the record pace in grain and bean exports in March 2020 has the momentum to spill over into April and the start of the second quarter of 2020. “We estimate that the record strong export of soybeans from Brazil will last well into May, while other major North Atlantic export regions will slow exports as they near their end of crop-season supply squeeze.”

While beans and grains have not seen a pop, the tail of the piggy is wagging positively. According to the National Hog Farmer, ASF, the driver behind China’s export demand, will continue.

The pullback in China’s purchases cannot be replaced. Data from the U.S. Census Bureau show while the U.S. has been successful in selling goods that were once consumed by China to other countries in the world, it’s not making up for the lost volumes. Comparing 2019 volumes to 2017, total U.S. seaborne exports of goods are down 2.6%. It is also important to highlight the increases in goods exports were to every region of the world except Asia and Europe. Why? Trade wars.

FreightWaves SONAR

“’Phase One’ of the trade agreement may reverse some of the lost volumes in exports to China but it will not necessarily provide a large boost to U.S. exports, as all tariffs on Chinese imports from the U.S. remain in place as well as the majority of those on U.S. imports from China,” explained Peter Sand, BIMCO senior shipping analyst in his March 26th note. “It also comes in the midst of the coronavirus outbreak which is affecting both demand for the goods in China and their production in the U.S., hampering higher exports.”

Just like the punchline of an April Fools’ joke which is not real, so are the results of the U.S. Phase One trade deal with China. Actions speak louder than words.