Giant shipload of soya beans circles off China, victim of trade war with US

August 8, 2018 - A shipment of soya beans worth more than $20m (£15.5m) has been bobbing aimlessly in the Pacific Ocean for a month, a casualty of the escalating trade war between China and the US.

Lingering uncertainty over the cargo’s fate offered a timely reminder of the fallout from a dispute that intensified on Wednesday, as the US president, Donald Trump, unveiled a second round of tariffs on $16bn of Chinese goods, prompting Beijing to respond in kind.

The Peak Pegasus, a 229 metre bulk carrier weighing 43,000 tonnes, has become the reluctant symbol of the potential consequences of this tit-for-tat trade spat.

The ship, owned by JP Morgan Asset Management, was scheduled to unload about 70,000 tonnes of American soya beans in the Chinese port of Dalian on 6 July, shortly after Trump imposed a first round of tariffs on $34bn-worth of goods.

As it rushed to shore in the hope of clearing customs before Beijing imposed retaliatory tariffs, the ship – and its protein-rich cargo – became an unlikely internet sensation on the Chinese social media platform Weibo.

However, the vessel arrived just too late and has been sailing around in circles ever since while the cargo’s owners, understood to be the agricultural commodity trading house Louis Dreyfus, decide what to do.

The Amsterdam-based company is thought to be paying about $12,500 a day to continue chartering the ship, which is idling in the Yellow Sea off the coast of China, indicating extra costs so far of more than $400,000.

Commodities experts said it could still make financial sense to keep the beans at sea, potentially for months, given the risk of making the wrong decision about what do next.
The market price of US soya beans has slumped since the trade war began as firms from China, the world’s largest importer, sought alternative sources.

That means potential alternative buyers for Louis Dreyfus’s soya beans in Europe or elsewhere would probably demand a discount on what they would have sold for originally.

Offloading them in China would incur a 25% tariff, adding around $6m to the cost of bringing them into the country.

“They [the cargo’s owners] have clearly got in mind the 25% tariff to take the goods into China and they’ll be weighing that against alternative buyers asking for a massive discount potentially equivalent to that,” said Michael Magdovitz, an analyst at Rabobank.

“They’d also have to pay an exorbitant price to divert the vessel from China to another destination.”

Soya beans are crucial for the production of cooking oil, biodiesel and meal used to feed livestock, including pigs reared to satisfy China’s appetite for pork.

One factor complicating the fate of the soya beans is uncertainty about the length of time that China can realistically switch to Brazilian soya beans as an alternative.

“The problem for the Chinese is that Brazil quickly runs out of soybeans around this time of year,” said Magdovitz. “It can’t be the only source for China.”

China accelerated imports before the tariffs came into force in order to build stocks and hold off paying the tax.

Magdovitz said the Peak Pegasus – and another soya bean-laden ship called the Star Jennifer that has also been idling offshore for a fortnight – could be waiting in the hope that China decides to subsidise soya bean importers.

That could render US imports affordable again, allowing the resumption of a soya bean trade worth $12.7bn a year.

Beijing blamed Trump for the escalation in the trade war as it announced 25% tariffs on another 333 separate US products from 23 August.

“This is a very unreasonable practice,” China’s commerce ministry said in response to Washington’s decision to target the additional $16bn of imports.

China said it would retaliate with 25% tariffs of its own on an equivalent amount of American imports, including steel, fuel, cars and medical products.

China and the US imposed tariffs on $34bn of each other’s goods in June and the latest move underlined Beijing’s determination to match protectionist measures like for like.

Shares on Wall Street opened slightly lower as fears that Trump will now make good on his threat to target a further $200bn of Chinese goods dented investor confidence.

The ratings agency S&P has expressed concerns that the trade war could spill over into services because China is running out of American goods to hit with tariffs.

The first Chinese trade figures since the imposition of the first round of US tariffs in early July showed that the country’s annual export growth edged up from 11.2% to 12.2% last month when measured in dollar terms.

Source: The Guardian