April 3, 2018
The tariff & the damage done: The impact of China's 25% import duty on US pork
Import smuggling, possible concessions to Chinese owned US integrators cannot prevent market share losses to European competitors, a flattening of US exports amid bloated inventories.
By Eric J. Brooks
An eFeedLink Hot Topic
On April 2nd, China delivered a much-anticipated hammer blow to America's swine sector. In retaliation to previously imposed tariffs on Chinese exports, Beijing imposed a 25% import duty on US pork exports, which (if one includes Hong Kong) were valued at US$1.1 billion in 2017 and had previously been projected at US$1.3 billion for 2018.
While these import duties could not have come at a worse time, quantifying the damage done America's swine sector is a tricky affair. US pork exports to China are mostly shipped to the mainland, with 180,000 to 190,000 tonnes annually destined for the Hong Kong Special Administrative Region (SAR). Not only does Hong Kong not impose the newly announced tariff on US pork, up to half the US pork it imports is smuggled into China.
According to the US Meat Exporters Federation (USMEF), 2017 US pork exports to China (including Hong Kong) were 495,637 tonnes valued at US$1.087 billion. Of this sum, a USFMEF estimated 309,284 tonnes valued at US$663.1 million was shipped directly to mainland China, with the remainder accounted for by Hong Kon.
Reflecting the past year's recovery in Chinese pork production, this is 15% lower than the 363,119 tonnes shipped to China by volume and US$714,960 million by value of US pork imported by China in 2016. While no one expected China to import 2016's record USDA estimated 2.6 million tonnes again, rising domestic demand was expected to keep 2018 pork imports steady near the previous year's level of 2 million tonnes (with Hong Kong accounting for slightly over 0.4 million tonnes of this volume).
Even so, with the US dollar falling from €0.94 in 2017 to around €0.80 this year, American pork had been expected to significantly increase its market share at the expense of EU's producers. In its Q1 Pork Quarterly, Rabobank forecasted US pork exports to China (including Hong Kong) of approximately 615,000 tonnes. Of that sum, a record 415,000 tonnes were expected to be shipped to mainland China. That would have been a 34% increase over its 2017 volume and 14% more than the 363,284 tonnes shipped in 2016.
At the time China's 25% import duty was announced, Q1 US exports to China and Hong Kong totaled 131,036 tonnes, of which no more than 90,000 tonnes were shipped to mainland China. With over 400,000 tonnes of US pork forecast to be shipped to China in 2018, that puts over 300,000 tonnes of exports over the next three quarters at risk.
According to USMEF CEO Dan Halstrom, "China is a price-sensitive market, so any tariff rate increase would affect the competitive position of U.S. pork." -Under China's new import duty, US pork goes from being 15% cheaper (relative to EU pork) than a year ago to being 10% more expensive.
If America does not negotiate this tariff out of existence, the US can expect to lose anywhere from 125,000 to 175,000 tonnes of the 300,000 tonnes of US pork exports that were expected to be shipped to mainland China between April and December of this year -and over 200,000 tonnes/year from 2019 onwards. Instead of rising to 415,000 tonnes, exports to China (excluding Hong Kong) would probably fall into the 225,000 to 275,000-tonne range.
Do Note: There are three large uncertainties and partial offsets to this forecast. First, US pork shipped to Hong Kong is suddenly becoming 25% cheaper than what is sent to neighboring China, with which it shares a land border. Expect US pork exports to Hong Kong to rise, and most of this increase to be smuggled into China.
Second, led by WH Group (which owns Smithfield), several large Chinese integrators have invested heavily in US pork production. At the time of publication, it is not known if China's government will exempt their pork imports from this tariff.
Third, anytime from now through to several months time, America and Chinese negotiators may come to an agreement that makes this 25% tariff go away as quickly as it was imposed.
With this import duty in place, EU exporters based in Spain, Germany, Denmark and Poland are in a position to divide up a 125,000 to 200,000-tonne windfall among themselves. Just days before China imposed its tariff, the USDA reported that at 72.9 million head, America's hog herd was at its highest level since the early 1940s.
Amid these bloated hog numbers, projected 2018 export growth may have been reduced from 4.5% (totaling 2.706 million tonnes) to under 1% or 2.60 million tonnes. With exports having absorbed 28% of US Q1 2018 pork production, China's 25% import tariff is a severe deflationary blow to America's swine sector.
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