Trade Wars: How Regulations Increase Global Energy Supply Chain Complexity and Risks
The movement of commodities from production source to consumer — the supply chain — is a process that, regardless of the commodity type, is almost always fraught with considerable risks, including operational, price, and regulatory risks.
Many of those supply chain risks, though largely unpredictable, can be alleviated to some degree. Insurance products lessen weather risk, and hedges mitigate price risk. However, regulatory risks are much more challenging to forecast and manage.
Though some regulations impacting commodity supply chains, such as subsidies for renewable energy and renewable energy standards, can be forecast based on pending legislation (providing affected producers and buyers time to adjust to the changing landscape), others can be more immediate and challenging to predict and, once enacted, can wreak havoc on profitability and even long-term investment decisions.
Trade Wars and Heightened Uncertainty
The Trump Administration’s trade battle with China and the continuing “tit for tat” tariffs are shining a bright spotlight on the risks and complexities of the global supply chain for all types of commodities, from steel to soybeans, and are increasing costs (and decreasing profits) for all involved. Though it’s not yet clear how the current trade war with China will resolve itself, this battle has taken a toll on the global energy supply chain as U.S. energy exports — including ethanol and LNG — are being hit with punitive tariffs in China.
Rising Tariffs Impact the Bottom Line
When the Chinese government announced a 10% tariff on LNG imports in late 2018, several tankers bound for that market from the U.S. were forced to redirect mid-sea to other ports and markets, increasing costs and decreasing profits for the cargo owners, both non-Chinese buyers selling directly into that market and native Chinese companies. And as the tariffs have taken hold and have been ratcheted up to 25%, fewer Chinese companies and commodity merchants (buying for resell in China) are purchasing U.S.-produced LNG, forcing producers and tolling capacity holders to seek out other, less lucrative markets in Asia, Europe, or South America. Chinese buyers have also started to consider pulling back from existing purchase agreements for LNG and put on hold potential investments in new, yet to be built, U.S. LNG facilities. In turn, this will potentially delay final investment decisions for several planned new facilities and trains within existing facilities.
Ethanol producers have been hit as well, where recently enacted tariffs of up to 70% are in effect on U.S.-produced ethanol. As a result, like LNG ships, ethanol tankers that were destined to China ports were redirected to others in the Asia-Pac region in order to off-load cargos outside the Chinese territory and/or transload ships in order to blend the U.S. stocks with ethanol produced elsewhere (as a loophole in the tariffs allows for up to 40% of U.S.-manufactured product).
Countering the Unexpected with Full Supply Chain Visibility
It is the unpredictable and almost immediate nature of these tariffs that is most damaging. Again, while most regulations are planned and debated, perhaps years ahead, tariffs can take force within days of announcement, providing producers, merchants, and end-use buyers little or no time to adjust their sales and purchasing plans (not to mention dealing with cargos in transit), leading to significantly higher costs, stranded inventories, and much lower profits.
When these situations do arise, it is vital that affected producers, merchants, and end-users react quickly to avoid potentially catastrophic losses. Unfortunately, without full visibility into optionality built into that company’s supply chain (i.e., where and when can cargo be redirected) and new sources or markets for existing inventories (particularly inventory in transit), there will be little that an energy or commodity company can do to prevent those almost immediate losses.
Such visibility requires an integrated approach to commodity management, including global market data, origination, trading, analytics, logistics, and settlement. Without a singular view of your operations and the optionality inherent in your supply chain, similarly exposed competition may be able to move more quickly to identify and capture opportunities that might briefly exist in new or existing markets outside of those tariffs’ boundaries. That’s one of the many ways next-generation commodity management software and advanced analytics like Allegro is helping commodity businesses take total control over how they grow. With Allegro and added value solutions like WAM, commodity organizations can optimize their supply chain and drive profitability for their businesses.