As China threatens the U.S. with new tariffs on $60 billion in goods, they are sending a strong message to the U.S. that it must curb its escalating wars or else. President Donald Trump continues to underestimate the relevance of China not only in trade but also in major currency and bond markets, which have a direct impact on the U.S. consumer, who will ultimately pay for increases in imported goods.
The New Silk Road
China has built a 21st century version of the old Silk Road, with a "strategic road and maritime belt" spanning from the crude oil port of Rotterdam to cities in poor but geographically critical nations, such as Istanbul, Tehran and neighboring former USSR countries. To make itself less vulnerable and less dependent on trading partners, China has been taking steps to increase its footprint in commodity intensive regions like West Africa and Latin America to diversify their supply of raw materials. With these moves, Beijing is cementing its position as a center of a new economic empire spanning the globe.
Energy trade routes for China have been secured in the Middle East with China now being one of the largest buyers of Persian Gulf crude oil displacing, the role that the U.S. once had.
Buying Power of State-Owned Enterprises
China state-owned oil titans like CNOOC Ltd ( CEO) have extended their footprint from the deep waters of West Africa to as close home as Canada and Latin America. We see CNOOC as major acquirer of oil and gas companies outside the U.S. (most recent example was the acquisition of Nexen of Canada for $15.1 billion in 2012). We think the next acquisition could be a large West Africa player of the likes of Ophir Energy ( OPHRY) or once troubled Latin American player, Frontera Energy ( FECCF) .
China's largest refiner, Sinopec ( SHI) , will likely hold off on buying U.S. crude as an escalating trade war between China and the U.S. threatens to make American imports more expensive. Sinopec had already been reducing its U.S. oil purchases, mainly because the spread between West Texas Intermediate (WTI) crude oil versus international marker Brent has narrowed. According to Platts, Sinopec had bought eight supertankers of U.S. domestic crude in June, however, we anticipate this number to drop as China adjusts to the new rules.
Glencore, China's Best Global Trade Friend
As U.S.-China trade wars escalate, Glencore International ( GLCNF) is best positioned to be the beneficiary of any increased Chinese trade in countries where Glencore has producing supplies (from Chilean copper and Colombian coal, to oil production in Chad, Cameroon and Russia, and infrastructure and port facilities and storage in Panama and the UAE).
John Fredriksen's Hand in Global Trade
With most global trade moving by sea, we expect China's new places of investments to be in ports along with pipelines and other transport links that connect to global markets. Our top energy transportation plays continue to be Golar ( GLNG) , one of the world's largest liquefied natural gas (LNG) carriers and Frontline Ltd ( FRO) , one of the largest operators of Very Large Crude Carriers (VLCC), vessels that can transport up to 2 million barrels of oil.
In regards to dry bulk trade, we think Golden Ocean ( GOGL) is poised to benefit from any escalating trade wars that would increase China's purchase of from other major trade partners.
Coincidentally, GLNG, FRO and GOGL are owned and operated by Norwegian billionaire John Fredriksen, who controls a vast empire of offshore services companies catering to the oil & gas and commodities market, including deepwater offshore driller Seadrill Limited ( SDRL).
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