(Bloomberg) -- A proposed 25 percent tariff on China's imports of American propane probably won't hurt U.S. companies as much as intended.
That's because U.S. propane exporters got Chinese buyers like China Petroleum and Chemical Corp., known as Sinopec, to sign long-term, binding contracts that include multimillion dollar fees as a penalty for breaking the agreements. It's not unheard of for buyers to pay the cancellation fee, or for Chinese buyers to renege on their contracts with U.S. exporters, but the optics aren't so pretty.
So what's the likely scenario, assuming that Chinese buyers stick to their contracted purchases? LPG cargoes picked up in the U.S. Gulf Coast would be resold into other destinations, and China buyers will depend on delivered cargoes, like those available from the Middle East, instead.
The biggest consequence? Higher prices across the globe, particularly in China where it could hit consumers, according to Sam Margolin, lead analyst at Cowen and Company LLC. Propane at the U.S. trading hub in Mont Belvieu, Texas, rose 0.63 cent to 78.13 cents a gallon Wednesday, DTN Energy data compiled by Bloomberg show.
“Even though the tariff is only applied to one country -- the U.S. -- anybody selling into China now knows the marginal cost is higher,” he said by phone from New York. “It raises prices globally for anybody selling propane.”
To contact the reporter on this story: Laura Blewitt in Houston at lblewitt@bloomberg.net.
To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Mike Jeffers
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