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27 July 2018

Soy it goes!

Agri/Soft Commodities, Manufacturing & equipment, Oil & gas, Power
Middle East & Africa, Americas, Asia-Pacific, Europe
It would be good to escape from major economic trade factors that are influencing our lives – if only for a while, and for some in the Northern Hemisphere that obviously comes as many folk now take their annual summer vacations.

It would be good to escape from major economic trade factors that are influencing our lives – if only for a while, and for many in the Northern Hemisphere that obviously comes as many folk now take their annual summer vacations. 

But, what none of us can escape from is the continued ratcheting up of the trade dispute taking place between the US and China. The world’s two largest economies. This affects us all however. Of course, the US is waging trade wars with many others, particularly so with the EU, and within NAFTA with Mexico and Canada. President Trump has a ‘bee in his bonnet’ about trade deficits, which is something that is not going to go away. And to be fair to him, he had promised those who voted for him that this was an area he would try and deal with.

Certainly, Trump appears to be in this for the long haul, and he doesn’t mind playing hardball. China is not able to play the tariff game and win with the US, but there are many other tools at China’s disposal that it could employ (I will leave most of that for another time). Not least of these is choice of trading partner.

Earlier this month, the US imposed 25% tariffs on $34 billion of Chinese imports such as machinery and electronics, which prompted Beijing to respond with tariffs on American exports of soybeans and other goods. 

US agricultural exports make up a major part of the export profile to China. Now, there are reports from the US that the Chinese are simply cancelling orders – particularly of food grade soybeans, and other Chinese buyers simply not visiting the US to arrange agri purchases. This is already impacting US farmers – many in states that were key supporters of Trump.

Indications are that China is turning to other sources where there is plenty of capacity of food grade soy – such as Brazil, Argentina, Russia, and India (more of this later). US traders are looking to divert shipments initially planned for China to other destinations. But this is big business, and no country buys on the scale of China. This also comes at a time when soy producers in the mid-West – in states such as North Dakota for example - are predicting a bumper harvest this year.

The damage being done could see the US lose out long term, and there are fears that US agri-economics may be in for a very rough ride. The impact on US agri is not confined to soy. China is a major buyer of US corn (maize) pork and beef. Over the last few years, pork sales to Chinese buyers have increased steadily as the economic rise of the middle class continues and dietary habits change.

The impact on US farmers has pushed the Trump administration to announce a plan to offer up to $12 billion in aid to farmers hit by tit-for-tat Chinese tariffs on their products. The emergency bailout was announced by Secretary of Agriculture Sonny Perdue on Tuesday this week.

Perdue stated: "President Trump has promised since day one that he had the back of every farmer and rancher." He said the assistance was a short-term solution, but that it would give: "President Trump and his administration time to work on long-term trade deals."

The aid will come from a mix of programmes overseen by the USDA and will be facilitated by the Commodity Credit Corporation. It will include direct payments to producers of some goods, including soybeans, as well as distribution assistance.

In response to this development, the American Soybean Association (ASA) said in a statement: "While soybean growers appreciate the Administration’s recognition that tariffs have caused reduced exports and lower prices, the announced plan provides only short-term assistance. ASA continues to call for a longer-term strategy to alleviate mounting soybean surpluses and continued low prices, including a plan to remove the harmful tariffs."

Before the details of the assistance plan to farmers was released on Tuesday, President Trump in characteristic bluster mode tweeted: “Tariffs are the greatest! Either a country which has treated the United States unfairly on trade negotiates a fair deal, or it gets hit with tariffs. It’s as simple as that - and everybody’s talking! Remember, we are the ‘piggy bank’ that’s being robbed. All will be great!”

And last Friday, in an interview with CNBC, Trump also threatened to put tariffs on all $505 billion of Chinese imports. Saying that the US had been taken advantage of, he stated: "We've been ripped off by China for a long time."

Mmmm…. Of course, there are a number even within his own administration that do not support such a view. And within both houses (Senate and Congress) there is considerable anger from many that the straightforward imposition of tariffs on a trade war footing has taken priority over traditional more balanced trade negotiations.

As I mentioned earlier, as a consequence of the trade war with the US, China is looking to increase agri purchases from a number of other countries, including India. Interestingly, earlier this month China cut the tariffs on a range of Indian products including soybeans. In fact, China has decided to reduce tariffs on soybeans imported from not just India, but also from South Korea, Bangladesh, Laos, and Sri Lanka from the current 3% to zero.

The trade developments between India and China are particularly interesting as there has often been quite difficult relations between the two nations. India’s two-way trade with China touched nearly $90 billion last year. The bilateral trade gap however was $63 billion, mainly due to Indian imports of Chinese-made heavy machinery, telecom equipment and electric appliances. So, again, there are trade imbalance issues here, but India will be pleased to see a changing relationship with China and the purchasing of more Indian goods.

But, also of concern will be how India is one of the few Asian countries to have been left out of the Belt and Road Initiatives (BRI). While in contrast, neighbouring Pakistan has been one of the real beneficiaries. Of considerable concern will be the development of the $60 billion China Pakistan Economic Corridor, which runs through Pakistan-administered land in the disputed Indo-Pakistan border region of Kashmir. Could we now see BRI inspired projects in India and greater cooperation between companies from the two countries? One would certainly hope so.

Now for a quick look back at some of the coverage from TXF over the last two weeks

Video: UKEF chief on simplifying ECA finance (Free to view)
UKEF has promised to improve access to export finance for UK SMEs. Louis Taylor, UKEF CEO, outlines the substance behind the rhetoric.

Credit where it's due: the new LMA Export Credit Agency Buyer Credit Facility Agreement explained (Free to view)
Kam Mahil, legal director at the Loan Market Association (LMA) and Ashley McDermott, senior associate at Clifford Chance, outline the methodology, and potential cost and efficiency benefits, of the LMA’s new form of facility agreement for use in export finance buyer credit transactions. 

Video: A collection of commodity expert insights (Free to view)
A variety of commodity finance practitioners give TXF their overview of trends, opportunities, challenges and predictions for the market.

Exclusive TXF Essentials subscriber content

Corporate perspective: Going ‘local-for-local’ helps Groupe SEB Turkey hedge against trade wars
Mustafa Kilic, CFO at Groupe SEB Turkey explains how a strategy of maximising local inputs can help manage currency risk through natural hedges, and even help guard against the burgeoning trade wars. 

KentuckyWired: Testing the line for appropriations risk
A near-death experience for Kentucky's debut US broadband PPP due to rising costs highlights the pitfalls to sponsors of states’ budgeting processes. But PPPs for US broadband will remain tempting.

Trade moves: TXF Data Country Risk Review Q2 2018
As North American risks continue to rise as President Donald Trump undermines NAFTA members with tariffs on iron and steel, the EU remains divided over the issue of migration, and China flexes its military muscles, TXF’s Country Risk Review reveals the latest country profiles in Q2 2018.

Corporate perspective: Piecing together the digital future at Mosaic
When will Michael Crawford, senior corporate treasury manager of Mosaic, the world’s largest phosphate producer, become a robot? Not for the foreseeable future. TXF’s Katharine Morton discusses technology and digitization with Crawford as Mosaic looks to integrate its January $1.4 billion acquisition of Brazil’s mining giant Vale’s fertilizer unit.

And finally, not on the net, our weekly news in brief headlines....

Capella Solar progressing with Albireo 1 and 2
Capella Solar – a subsidiary of Neoen – is putting together project financing for its $144 million Albireo 1 and 2 solar project in El Salvador…

First Guatemalan PPP concession awarded
Guatemala’s Agencia Nacional de Alianzas para el Desarrollo de la Infraestructura Economica (ANADIE) has awarded the 41km Escuintla Puerto-Quetzal toll road concession – the first public-private-partnership (PPP) in the country…

Two left in tender for Ferrocarril Central
Uruguay’s Ministry of Transport and Public Works (MTOP) has progressed two of the three bidding groups for Uruguay’s $800 million-plus Ferrocarril Central railway PPP to the next stage of the tender…

Open Fiber broadband financing nearing close
Open Fiber – the 50/50 Italian highspeed broadband joint venture between Enel and CDP – is expected to sign its €3.5 billion ($4.06 billion) project financing around the end of July…

Carbon Holdings to mandate banks for Tahrir in next two weeks
Carbon Holdings is expected to mandate commercial banks in the next two weeks to finance the $10.9 billion ECA/DFI-backed Tahrir Petrochemicals project…

BEPS: Avoiding mismatches in tax rules
The OECD has issued a public discussion paper on Base Erosion Profits Shifting (BEPS) that corporate treasurers may wish to pay attention to and submit responses to by 7 September…

Clifford Capital debuts project finance CLO securitisation
Clifford Capital – a Singapore-based policy-led boutique project finance arranger which is 40.5% owned by Temasek and benefits from a Singapore Ministry of Finance guarantee for all its debt issuance – has launched a $458 million CLO securitisation backed by cash flows from project finance loans...

Uralkali prices tighter on another PXF refi
The $825 million five-year deal, signed on 29 June, is more or less identical to the $850 million five-year PXF that it closed in August last year, although the margin has been shaved by…

PLN debuts offshore with tightly priced $2bn loan
Indonesia’s state-owned electricity company PLN (Baa2/BB/BBB) has begun seeking a tightly priced $2 billion offshore loan with banks e...

Resolute Mining signs new $100m RCF
Resolute Mining signed a new $100 million revolving credit facility (RCF) on 13 July. The three-year facility is fully underwritten by...

Texican signs extension and seeks new lead bank for RCF
Texican Natural Gas Company has signed a four-month extension on the one-year $100 million revolving credit facility (RCF) it signed on 13 July 2017...

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