Long, strange trip: How US ethanol reaches China tariff-free | The Daily Star
12:00 AM, February 08, 2019 / LAST MODIFIED: 12:00 AM, February 08, 2019

Long, strange trip: How US ethanol reaches China tariff-free

In June, the High Seas tanker ship loaded up on ethanol in Texas and set off for Asia.

Two months later - after a circuitous journey that included a ship-to-ship transfer and a stop in Malaysia - its cargo arrived in China, according to shipping data analyzed by Reuters and interviews with Malaysian and Chinese port officials.

At the time, the roundabout route puzzled global ethanol traders and ship brokers, who called it a convoluted and costly way to get US fuel to China.

But the journey reflects a broader shift in global ethanol flows since US President Donald Trump ignited a trade war with China last spring.

Although China slapped retaliatory tariffs up to 70 percent on US ethanol shipments, the fuel can still legally enter China tariff-free if it arrives blended with at least 40 percent Asian-produced fuel, according to trade rules established between China and the Association of Southeast Asian Nations (Asean), the regional economic and political body.

In a striking example of how global commodity markets respond to government policies blocking free trade, some 88,000 tonnes of US ethanol landed on Malaysian shores through November of last year - all since June, shortly after China hiked its tax on US shipments. The surge follows years of negligible imports of US ethanol to Malaysia.

In turn, Malaysia has exported 69,000 tonnes of ethanol to China, the first time the nation has been an exporter of the fuel in at least three years, according to Chinese import data.

Blending US and Asian ethanol for the Chinese market undermines the intent of Beijing's tariffs and helps struggling American ethanol producers by keeping a path open to a major export market that would otherwise be closed.

“Global commodity markets are incredibly creative in finding ways to ensure willing sellers are able to meet the demands of willing buyers,” Geoff Cooper, head of the Renewable Fuels Association, said in a statement to Reuters. The group represents US ethanol producers.

In at least two cases examined by Reuters, including that of the High Seas, blending of US ethanol cargoes with other products appeared to have occurred in Malaysia before the cargoes were shipped on to China, according to a Reuters analysis of shipping records and interviews with port officials.

Chinese merchants including the state-backed oil company Unipec notified Chinese authorities about the unusual activity last summer - which represented competition they had not anticipated under the tariff scheme, according to two industry sources.

Unipec's parent company Sinopec did not respond to requests for comment. A spokesman for China's General Administration of Customs declined to comment.

Norazman Ayob, deputy secretary general of the Malaysian trade ministry, confirmed that Malaysia exported ethanol to China this year. The ministry was unable to confirm whether it had been mixed with US fuel, he said, but noted such blending would be legal under the Asean-China pact.

Malaysia has no track record of significant domestic ethanol production, so it is unclear where the ethanol blended with the US product originates.

Additional US ethanol has flowed in unusual volumes to other destinations since Trump's trade war began, including other Asean member nations the Philippines and Indonesia, according to shipping and trade data, though Reuters could not confirm its final destination.

The High Seas cargo ship was among the first to engage in the rising US-to-Malaysia ethanol trade, according to shipping data from financial information provider Refinitiv and bills of lading from the ports.

It loaded 25,000 tonnes of ethanol in Texas City on June 23 and then another 10,000 tonnes in Beaumont on June 27.

Some of the ethanol was produced by Green Plains Inc, one of America's top ethanol producers. Green Plains spokesman Jim Stark confirmed the loading of the company's product in Beaumont but said it could not confirm the cargo's ultimate destination.

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