US-China Trade Tensions - Thinking Beyond Volatilities and Disruption to Steel Trade - Malaysian Iron and Steel ...
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US-China Trade Tensions Thinking Beyond Volatilities and Disruption to Steel Trade
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our dealings – with our customers and insight and a forward-looking Updated as of May 2019
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Rating
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Co)
2Leading Bank in Asia
UOB has understanding of Asian markets, corporate culture and business mindsets, which is matched by few. Our strong foothold in
Singapore, Malaysia, Indonesia, Thailand and China is well-placed to create greater access and growth in this region, for our
customers.
Branch Banking in ASEAN (as of May 2019)
Japan
Incorporated in 1972
Branches Singapore Malaysia Thailand Indonesia Total 1 Branch
China South Korea
UOB 43 45 152 178 418 Incorporated in 2007 Incorporated in 1983 as
12 Branches & 4 Sub-branches representative office
DBS 28 0 0 37 65 1 Branch
OCBC 42 46 0 336 424
Hong Kong Taiwan
Incorporated in 1995
HSBC 12 62 1 62 137 4 Branches
Incorporated in 1995
1 Branch
SCB 12 32 1 99 144 Thailand
Incorporated in 2005
152 Branches Philippines
CITI 9 11 2 10 32 Incorporated in 1999
1 Branch
Vietnam
Myanmar Incorporated in 1995
Incorporated in 2015 2 Branch
1 Branch Received In-principle foreign-owned
India subsidiary bank license in 2017; Officially a
Incorporated in 2009 foreign-owned subsidiary as of 2 July 2018.
1 Branch
Malaysia HQ Singapore
Incorporated in 1993 Incorporated in 1935
45 Branches 43 Branches Brunei
Incorporated in 1974
1 Branch
Indonesia
Branch with Transaction Banking presence Branch Incorporated in 1956
178 Branches
3Nine megatrends for 2019 & beyond
Empowerment of the East Rise in anti-globalisation sentiments
Rise of China and ASEAN Disruption of trade flows (US-China tariffs)
Rise of the middle-income consumer Nationalism vs Globalisation
Belt Road Initiative Trade diversion, product substitution and reshoring
Made in China 2025
Banking – regulation to
Rise of digital and data
digitalisation 10 years after the iPhone was launched
10 years after Lehman - The Fourth Industrial Revolution
shifting towards the Asian banking model Aggregation of static, flow and behaviour data
Next 10 years banks will see on their
digital/data journey
Growing importance Human disengagement
of ESG Evolution of ways we communicate-
Hi-Tech, Hi-Touch and Hi-Trust
Environment, Social and
Governance
Blurring boundaries Inflation & dis-inflation
Convergence of industries Inflation of asset prices and dis-inflation
Increasing ecosystem collaboration of goods and services
Agile
Learn, re-learn, unlearn
Discomfort is new norm; need to challenge
existing norms 4
Source: Various sources, UOB analysisUS-China trade balance
Trade balance
US$’ bn
700
600
Since 2001, the US
500
has been running
400 China 526
entered 444 459 486 504 487 493 a trade deficit with
300 417
WTO in
2001 356
383 China. The
340 310
200 306
100 163
211
260
deficit rose
102 134 92 104 111 122 124 116 116 130 110
0 19 22 28 34 41 55 65 71 70
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
to almost
-100
-200
-83
-111 -135
-176
US$400bn
-300 -219
-251 -275 -240 in 2017.
-285 -291 -313
-400 -334 -337
-363 -388 -372
-396 -382
Exports to China Imports from China Balance
Source: TradeMap 5Explaining the trade imbalance
Result of successful outsourcing policy over last 30 years
Shift of US companies China becomes US-China Trade
into China largest US Tension
Companies such as Microsoft foreign creditor 10-25% tariffs
and Motorola shifting China bought implemented
production to China due to about $300 bn to reduce trade
lower costs of production US treasuries imbalance
1971 – 72 1990s 2000 – 01 2008 2015 2018
Improving US-China Normalising trade relations ‘Made in China
relations amid Cold War • In 2000, US-China 2025’ announced
President Richard Nixon Relations Act of 2000 Movement
became the first President signed towards skilled
to step foot into China • In 2001, China joins the labour
World Trade Organisation
Source: Council of Foreign Relations Organisation 6Sleeping giant awakens
The West dominated the world over the last two centuries
Biggest economies in the World relative to China in GDP (USD bn)
China’s proportion of global GDP
33% 11% 4% 21,340 16%
2,220
312 14,200
229
218
185
111
606
366 2,970
36
China India U.K. U.S. China U.K. U.S. Germany China U.S. China India
1820 1900 1962 2018
7Since withdrawing from the TPP, US is left with only
21 free trading partners
Canada
North Jordan
American
FTA 1989 US Morocco Jordan FTA 2010 South Korea
Morocco FTA 2006 Bahrain KORUS FTA 2012
Bahrain FTA 2006
Israel
Mexico Israel FTA 2010 Oman
Costa Rica, Dominican Republic, El Salvador, Oman FTA 2009 Vietnam
Guatemala, Honduras, Nicaragua, Panama Vietnam BTA 2001
US- Colombia TPA 2012 Colombia CAFTA-DR (Dominican Republic-
Singapore
Central America FTA)
Peru Singapore FTA 2004
Peru TPA 2009
Australia
Australian FTA 2005
Chile
Chile FTA 2014 FTA : Free Trade Agreement
TPA: Trade Promotion Agreement
BTA: Bilateral Trade Agreement
Source: Newswire 8US Tariff: Chinese Exports to US
Breakdown of US$250bn Tariff Items (25%) Breakdown of US$300bn Tariff Items (10%) by Sectors
by Sectors (1 Sep)*
IND 100 TMT 115
TMT 68 CG 90
CG 40 IND 27
O&
G 14 O&G 7
C&I 3 C&I 0
Oth Othe
ers 47 US$bn 34 US$bn
rs
0 50 100 150 0 50 100 150
Source: Trade Map, UOB Analysis. *Tariff on some items have been deferred to 15 Dec 2019. 9Implications of the Trade Tension
Reshoring Product Substitution
Moving the The substitution and
production and replacement of a product
manufacturing with a different product.
of goods from one Trade Diversion
country to another.
Diverting trade from Dumping
one country to another.
When a country or
company exports a
product at a price that
is lower in the foreign
market than the price
in the domestic market.
10Chinese Exporters See Trade Dispute Continuing
Post-Trump
How long do you expect the US-China trade dispute to continue? (% of respondents)
100 Legend
I don’t know
80
It won’t end – this is the
permanent state of bilateral
relations
60
It will continue until Donald
Trump leaves office
40 It will end within 12 months
It will end within 6 months
20
0
March April May June
Source: Financial Times 11Overview: Industrial Goods Exports from China to US
Total value: ~USD 100bn
2.9
Spark
ignition
engines
2.4
Motor
vehicles +
other
transport
11.8
equipment
3.7 2.9 2.1
Motorcycles Parts + access,
Parts and access of and electric Trailers and nesoi, of indust.
Motor Vehicles motors semi trailers vehicles + tractors
All values in USD bn 12Overview: Industrial Goods Exports from US to China
Total value: ~USD 37.5bn
Wood and related
products, 3.5
Cross country cars and Machine parts and tools, Non ferrous ores, powders Paper and
station wagons, 11.0 9.1 and concentrates, 8.2 paper related
products, 0.8
Batteries Coal
Machinery,
and trans- and
2.7 formers, lignite,
0.6 0.4
Air-
craft
s,
0.30.2
Textile related products,
Ferrous products, 0.2
All values in USD bn Rubber and related products, 0.1 13Parts and Accessories of Motor / Industrial Vehicles
(including ignition engines, trailers and semi-trailers)
Trade Diversion Product Substitution Reshoring Dumping
beneficiaries
• Chinese companies affected by tariffs while US companies seek alternate sourcing from SEA
• Example: Chongqing Bona Auto Parts Co., Ltd
Chinese manufacturer exporting a full range of car parts to US buyers
Exports fell by 20% after tariffs were implemented
Trade
Diversion • Example: Foreign Parts Distribution Inc.
US company that mainly imports car parts (steering and suspension) from China
Looking to move sourcing away from China to avoid tariffs
e.g. Thailand, Malaysia, Vietnam
• Some trade is being diverted to Vietnam – Vietnam’s trade with the US grew by 32.3% in 5M19 vs. same period last year
• Example: Chinese Motor Company
Reshoring of Chinese auto parts companies to other parts of ASEAN
Express interest to relocate to Vietnam
Reshoring • Example: Thai Rubber Company
Will continue to operate their three factories in China but make Vietnam their primary factory to avoid tariff costs and
maintain the company’s global expansion trajectory
Rubber and metal parts suppliers who supply directly to Chinese customers may suffer from reduced sales
14Localisation of US-made Cars
• Accelerate localisation of US-made cars in China
Example: Ford Motor Co.
To further localise its China operations as part of its efforts to seek a turnaround in the
world’s largest automotive market
Move is expected to accelerate the re-organisation of its business in China
Ford’s premium arm Lincoln will roll out its first China-made model later this year, with
another two models to join the localised lineup by 2021
• Risks on dealerships heavy reliant on US models
Example: Ford Motor Co.’s China business lost Table: Top 4 US-to-China Exporter in 2017
$128 million in the first quarter as sales plunged 36% Brand Number of Vehicles Exported
BMW (X5/X6) 106,971
Mercedes 72,198
Ford Motor 45,145
Fiat Chrysler 16,545
15Chinese Heavy Machinery to Replace US Machinery
Anticipates $100 mio cost increase from
steel and machinery parts Bolstering the Changzhou facility at
Decline in US soybean exports affecting a total investment of $100 million.
sales
Only 30% are international
sales, not heavily hit by U.S.
export tariffs
Cost of sales rose 11% in 1Q19.
China sales grew the slowest in
history
BRI opportunities and
competitive price of equipment
may spark more demand
5
Source: Nikkei Asia, Bloomberg, Financial Times, China DailyBelt & Road Initiative: SEA Infrastructure Growth Story Drives
the Chinese Machinery Equipment Segment
China-Indochina Peninsula # of projects
Economic Corridor Size (US'B)
Regional transportation & Transportation Construction Energy
infrastructure network to
facilitate sustainable socio- 8 3 1
China's Belt & Road economic development in
~25B ~37B ~3B
initiatives South East Asia
15 8 8
Covering 65 countries, 4.4 China Pakistan Economic
billion people and ~40% of Corridor (CPEC) ~30B ~2B ~23B
global GDP
5 2 1
Bangladesh-China-India-
Seeks to enhance regional Myanmar Corridor ~36B ~1B ~2B
connectivity by developing
an unblocked network and New Eurasian Land Est. Size
distribution infrastructure Top 5 Projects
Bridge Economic Corridor (US'B)
between China and Rest of MY Refinery and Petrochemicals Complex 27
the World China-Central Asia- ID Kayan River Hydropower Project 18
West Asia Corridor TH Chiang Khong – Ban Phachi Railway Line 12
ID Jakarta-Surabaya High-Speed Railway 12
China-Mongolia-Russia SG North South Corridor 5
Economic Corridor
6
Source: Press Search, UOB analysis, BCG trade databaseTrade flows to Malaysia post tariff
In 2018, China increased its steel export to Malaysia Flat, Long, Semi and Stainless are categories that
while decreased its total export post tariff contribute to the export growth
7% 14 ‘000
% tons
1,200.00 16%
‘000 ‘000
1,000.00 15%
tons
4,000.00 30,000.00
800.00
25,000.00
3,000.00
20,000.00 600.00
2017
2,000.00 15,000.00 400.00 14%
15% 2018
10,000.00
1,000.00 200.00
5,000.00
- - -
2014 2015 2016 2017 2018
Malaysia import from China(LHS)
China export to world(RHS)
Source: Trademap.orgSteel Protectionism- Rising with more AD measures
Trade Friendly Agreements Anti-Dumping Duties
Indonesia • Indonesia-Australia Comprehensive Economic Partnership • Tariffs on colour-coated steel sheet imports from Vietnam and China
Agreement • Indonesian Iron and Steel Industry Association (IISIA) lodged a formal
• Obtained U.S. import tariff exemption for 161 steel complaint with the industry ministry over a sudden increase in boron-infused
products steel which is exempt from import tariffs
• Extend 11.93% tariff on H and I sections on April 24
Thailand • Obtained U.S. import tariff exemption for steel pipes • Tariffs on hot-rolled coil imported from South Korea and on certain cold
rolled steel from Vietnam
• Extended a safeguard measure for non-alloy and non-coil coated steel
sheets
• Federation of Thai Industries (FTI) is calling on the government to protect
local steel makers
Malaysia • Australia – Malaysia free trade agreement • Tariffs on cold-rolled stainless steel imports from China, South Korea, Taiwan
and Thailand
• Safeguard duties for steel concrete reinforcing bar (rebar) and steel wire rods
& deformed bar in coils for 2017 – 2020
• Anti-dumping duties on HRC from China, Indonesia for 2015 – 2020
Vietnam • Signing of the Comprehensive and Progressive • Tariffs on imported cold-rolled stainless steel products from China,
Agreement for Trans-Pacific Partnership (CPTPP) and the Indonesia, Malaysia, Taiwan, steel billets and steel bars
upcoming signing of the free trade agreement between • U.S. imposed duties of more than 500% on cold-rolled steel and over 200%
Vietnam and the EU on corrosion-resistant steel made in Vietnam with Chinese origins
China • China's new tax rebate for steel exports has increased • 25% tax on steel exported to U.S.
from 0% to 9% and 9% to 13%, depending on the steel
productsLonger term implications for China’s manufacturing
1 Most companies will keep
their existing production
facilities in China
Low-end manufacturing likely to move out of China due to the rising labour costs:
• Manufacturers were already looking to shift out of China to Southeast Asia due to the rising
labour cost in China. Rising trade tensions will help to accelerate this process.
2 Low-end
manufacturing likely
to shift out of China
Complex tech supply chains will remain in China in the long-term:
• Companies engaged in the production of goods and supply of services cannot just be picked up
and moved. It takes years to renegotiate contracts and to move physical equipment.
• A shift in the entire supply chain will take at least 5 years and will require sourcing for labour and
training employees.
Major changes not expected in the short-term:
3 Higher-end
manufacturing to
remain in China
•
•
It is a complicated process for countries to shift facilities outside of China.
Global brands with diverse production locations will make changes to their production line to avoid
exporting to US from China but will still maintain their existing production facilities in China.
20Contacts
Scan the QR code to contact us and obtain a copy of the
presentation and access more industry insights
Ivan Cheng
Head of Business Insights
Ivan.ChengSW@UOBgroup.com
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