The trade war between China and the United States is on, and the lubricants industry is caught up in it, along with many others. Analysts say some companies are affected more than others, and that many are trying to navigate the new seascape in order to minimize financial impacts.
On July 6 each country implemented 25 percent tariffs applying to hundreds of products, including lubricants and lubricant additives. The U.S. levies apply to an estimated $50 billion per year of imports from China, while Chinas apply to $30 billion in U.S. goods. The U.S. has already announced plans to impose 10 percent tariffs later this year on another $200 billion in Chinese goods.
Additive companies may face the greatest impact for Chinas lubricant industry, according to Geeta S. Agashe, president of consultancy Geeta Agashe & Associates, LLC. I think this will impact the prices for additive components and additive packages made in China that are imported into the U.S., she told a reporter.
In terms of goods flowing in the opposite direction, three of the worlds four largest suppliers of lube additive packages – Lubrizol Corp., Chevron Oronite and Afton Chemical – are based in the United States, but Lubrizol and Afton already have manufacturing plants in China, which would not be subject to the tariffs. Oronite does not yet manufacture in China but supplies that market – largely, at least – from a plant in Singapore.
Within the lubricants industry, there are more U.S.-based additive, base stock and finished lube companies supplying into China than there are Chinese companies supplying to the U.S. Some companies are now paying new tariffs and trying to figure how to recover those costs, said Jim Eggenschwiler, director of global trade at The Redstone Group. During a webinar organized by the Independent Lubricant Manufacturers Association last week, he said that doing so can be tricky because several factors need to be considered.
I have used and seen others employ a special surcharge quite successfully in circumstances involving unexpected cost increases caused by uncontrolled factors. This is usually preceded by a special notification to the importing customer by the exporting supplier that explains the intended surcharge, the reason it is being implemented, and its intended temporary duration, he said in an interview.
Although occasionally the entire price increase is passed on to the customer, a majority of companies choose to share the cost, which Eggenschwiler suggests. However, this necessitates a solid understanding of the commercial terms that apply to the transaction. I have seen most instances of [special surcharges] successful by careful design of the surcharge, he added.
There are some circumstances in which shipments can achieve limited duty or duty-exempt status, depending on sales volume and transportation route. Eggenschwiler suggested four potential tactics for companies to consider when attempting to reduce costs associated with the tariffs. All are based, he emphasized, on the assumption that the trade war will end relatively soon.
One tactic is reclassifying products, but that may not be practical in this case because of how the tariffs are being implemented.
The classifications included in the ad valorem tariff charges are broad enough that reclassification will be very difficult, if at all possible. In many instances classifications will differ based on intended use, and the alternative uses can be very specific and numerous, said Eggenschwiler. An ad valorem duty is based on the assessed value of an item.
Companies may also consider attempting to reduce the affected volume by coordinating with trade partners to meter shipments and volume; subdividing order volume with staggered arrivals; utilizing free and foreign trade zones and similar bonded warehouses; and coordinating vessel unloading at destination ports. Such tactics, however, may increase transportation charges.
Shipping through an intermediate country may be a simpler option.
Eggenschwiler advised companies that consider transporting through an intermediary country to weigh their proximity to the destination country; confidence in the sanctity of products sold to the distributor in the intermediary country; the integrity of the distributor in the intermediary country and overall confidence in the ability of the distributor to perform as you intend, advised Eggenschwiler. Canada, Singapore, Taiwan, South Korea and some areas in Malaysia and the Philippines are good choices for goods bound for China.
One of the nuances is that some [tariff] codes focus on a careful definition of manufacture origin, while others apply based on shipment origin. Where an import classification in China or in the U.S. applies to the shipment origin of an imported good, and not to the manufacturing origin of that good, the sale of products to distributors in third countries can change the applicability of the tariff rate associated with that classification, he explained.
The U.S. kicked off the tariffs tit for tat, imposing its first round on grounds that unfair regulations in China lead to the theft of technology patents and software from U.S. tech companies hoping to operate there. Agashe said same dynamic applies to additive companies, where the Chinese are asking for technology know-how in return for access to Chinas market.
The U.S. could implement its second round of tariffs in August. The government is accepting comments on these tariffs through July 23. ILMA encouraged companies to contact their congressional representative as well as ILMA if the new tariffs are having an adverse effect on business.
ILMA also encouraged all companies to review existing contracts to determine if there are provisions allowing for an adjustment due to unforeseen price increases, like tariffs or taxes.