Soybean shipload worth more than US$20 million circles off China, victim of trade war with US

The Peak Pegasus rushed to China’s shore in the hope of clearing customs before Beijing imposed retaliatory tariffs but arrived too late

PUBLISHED : Thursday, 09 August, 2018, 4:35am
UPDATED : Thursday, 09 August, 2018, 10:54pm

A shipment of soybeans worth more than US$20 million (HK$157 million) 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 US President Donald Trump unveiled a second round of tariffs on US$16 billion 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.

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

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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 US$12,500 (HK$98,000) 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 US$400,000 (HK$3.1 million).

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 soybeans 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 soybeans 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 per cent tariff, adding around US$6 million (HK$47 million) to the cost of bringing them into the country.

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“They [the cargo’s owners] have clearly got in mind the 25 per cent 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.”

Louis Dreyfus was approached for comment and JP Morgan declined to comment.

Soybeans 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 soybeans is uncertainty about the length of time that China can realistically switch to Brazilian soybeans 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.

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Magdovitz said the Peak Pegasus – and another soybean-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 soybean importers.

That could render US imports affordable again, allowing the resumption of a soybean trade worth US$12.7 billion (HK$99.7 billion) a year.