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The Trump administration is planning to halt significant U.S. ethane exports to China, a move that comes in response to China's recent restrictions on the export of certain rare earth metals to the U.S. This development signals a potential intensification of the trade conflict between the two economic superpowers.

Enterprise Products Partners, a major player in the ethane export market and ranked 78 in the Fortune 500, revealed that it was notified by the U.S. Commerce Department on June 4 about the intent to deny the shipment of 2.2 million barrels of ethane from Texas to China. The company has been given 20 days to respond.

This possible embargo follows a directive from the Commerce Department in late May, mandating U.S. companies to obtain special federal licenses to export ethane and butane to China due to concerns that these natural gas liquids could be used for military purposes.

China is the largest importer of American ethane, a key component in petrochemicals and plastics manufacturing. The U.S. is the sole major exporter of ethane, placing China in a position of heavy reliance on these exports. Currently, about half of all U.S. ethane exports are shipped to China, and redirecting these shipments to other countries poses considerable challenges.

Kristen Holmquist, managing director of analytics for RBN Energy, noted that this decision could have drastic consequences for the U.S. ethane market and global trade flows. However, the impact on China could be even more severe. According to East Daley Analytics' Julian Renton, China’s plans for petrochemical expansion could be undermined, leading to stalled projects and critical feedstock shortages in existing plants.

In a recent filing with the U.S. Securities and Exchange Commission, Houston-based Enterprise expressed uncertainty about obtaining the necessary special licenses in a timely manner. The company noted that its ethane and butane operations could be jeopardized. Although Enterprise was notified on June 4 about the denial of its emergency requests for three ethane cargoes, it refrained from further comments.

Energy Transfer, another key player, indicated in a June 4 SEC filing that it intends to apply for the special license and seek emergency authorization to maintain its ethane exports to China.

The export restrictions have introduced significant uncertainty to the U.S. ethane sector. If the required licenses are delayed or not granted, the new regulations could have lasting repercussions on the industry, as highlighted by Holmquist.

The ongoing trade dispute saw China previously imposing substantial tariffs on U.S. goods, placing ethane exports at risk. Nevertheless, China's need for ethane led to a tariff exemption, underscoring the critical role of this product in its petrochemical industry.

While butane restrictions will have a minor impact due to its smaller export volume to China, the absence of similar restrictions on propane, despite its significant export levels to China, raises questions.

Data from the U.S. Energy Information Administration shows that the U.S. exports approximately 250,000 barrels of ethane and 360,000 barrels of propane to China daily. With overall U.S. production of natural gas liquids having surged to over 7 million barrels per day, the country has seen a boom in petrochemical plant construction and burgeoning export markets.

The dilemma facing U.S. ethane producers is significant. Although ethane exports are challenging to reroute, domestically, surplus ethane can be absorbed into the natural gas stream for power generation, a process known as ethane rejection. This, however, would diminish profits tied to ethane transportation, storage, and export.

This intricate trade interplay continues to develop, with both American and Chinese industries closely monitoring the unfolding ramifications.