The Urethane Blog

Tariffs and MDI

Impact of the US-China trade war on the MDI market

23 August 2019James Elliott

The polymeric methyl diphenyl diisocyanate (pMDI) market has been impacted by the latestdevelopments in the United States-China trade war. pMDI, a key polyurethane feedstock, was initially included in the list of $200 billion of Chinese imports that were tariffed by the United States Trade Representative in response to China’s trade practices. US pMDI imports from China were subject to a 10% import tariff beginning September 24, 2018. This rate was subsequently increased to 25% on May 10.

The main polyurethane feedstocks – including pMDI, monomeric methyl diphenyl diisocyanate (mMDI), toluene diisocyanate (TDI), and polyether polyols (produced via the intermediate propylene oxide) – are reacted in different combinations to produce polyurethanes. The most common product is flexible and rigid polyurethane foam.

Polyurethanes are used in a myriad of applications. The buildings we live in, the mattresses we sleep on, and the shoes we wear can all contain polyurethanes. Even surfboards are made from rigid polyurethane foam. Polyurethanes are everywhere.

The global pMDI market has been volatile lately. In 2017, supply shortages triggered by plant outages and insufficient capacity investment led to a pMDI price surge. Prices collapsed in the second half of 2018, as supply significantly improved and demand waned amid product substitution and the cooling global economy. In late-Q1 2019, the pMDI market picked up with reinvigorated demand thanks to the peak spring construction season.

However, the escalation in the US-China trade war and implementation of the 25% trade tariff will impact global pMDI demand growth and in the United States. Slower global economic growth is now forecasted. One upshot is a weaker outlook in construction activity, including in the United States, moderating growth in building insulation demand; the largest pMDI end use in the United States is in rigid polyurethane and polyisocyanurate foam based insulation. In general, IHS Markit forecasts softer pMDI demand growth compared to the healthy growth exhibited in recent years. Weakness in other sectors such as the automotive industry – an industry facing its own challenges – is also projected to stifle US pMDI demand growth.

The United States, the second largest pMDI-consuming country, has seen its pMDI trade position shift in recent years. Historically, the US was a net exporter of pMDI. Today the country still exports a substantial volume of pMDI, including more than 200,000 metric tons (mt) in 2018.

The US pMDI market has recently exhibited high demand growth rates. Yet there has not been a major greenfield MDI capacity investment in the United States for many years. As the US import requirement grew and the pMDI market structurally tightened, the US became a net importer of pMDI in 2018.

Subsequently, the US market has become dependent on imports to meet demand. Approximately 71% of the 300,000 mt of pMDI imported into the US was sourced from China. Based on IHS Markit’s US pMDI monthly index and the monthly import volume, this equates to just under $500 million worth of imports.

The introduction of the 25% tariff will ensure that volatility continues in the pMDI market, especially in the US. US pMDI prices are forecast to rise not just because the tariff increase, but also because Chinese supply is expected to moderate as exporters reduce US shipments.

The United States trade position will rebalance. pMDI imports will decrease in 2019. Exports are also projected to drop as more domestically produced material remains in the US market to meet the deficit arising from reduced Chinese supply. Agreed contractual volumes will continue to flow from China to the United States. In such circumstances, pMDI consumers will face rising prices where contracts allow. The impact a trade rebalance will have on the market is one factor amongst others contributing to upward price momentum anticipated in the second half of 2019. It is unlikely direct long-term supply shortages will be experienced due to the consequences of the tariff introduction. Instead major end users in the construction, appliance and wood composite industries will not have to moderate end use production, rather face higher polyurethane material costs.

Other polyurethane feedstocks are also impacted by the US-China trade war. The US implemented the 25% tariff on TDI and propylene oxide. On May 13, China applied retaliatory tariffs of 25% on pMDI, mMDI, and TDI as well as a 10% tariff on propylene oxide.

IHS Markit launched its new Global Polyurethane Feedstocks Market Advisory Service in March. This service helps clients navigate pricing, supply, and demand volatility in the polyurethane feedstocks markets. It also provides deep insight into the latest market developments, such as the impact of the US-China trade war on the polyurethane feedstocks markets.

Posted 23 August 2019 by James Elliott, Principal Analyst, IHS Markit