The two new forces in the global liquefied natural gas (LNG) market—the United States as a supplier and China as a buyer—are locked in an escalating trade war, which saw Beijing slappinga 10-percent import tariff on imports of U.S. LNG.
Although the levy is lower than China’s initial threat of a 25-percent tariff, it is bound to influence the LNG market in the short-term with winter coming in the northern hemisphere, and in the long-term with shifting trade routes.
The Chinese tariff could prompt non-U.S. suppliers of LNG to charge from Chinese buyers on the spot market higher prices that would be just below the U.S. LNG price with the 10-percent tariff, according to analysts who spoke to CNBC.
This higher LNG pricing could cost Chinese buyers—mainly the state-held giants PetroChina, Sinopec, and CNOOC who are the most active on the market—an additional US$4 million to US$5 million in expenses on procuring LNG, CNBC reports, quoting energy consultancy Wood Mackenzie.
The tariff that China imposed on U.S. LNG cargoes could backfire on Beijing, which will have to pay higher prices for LNG from non-U.S. sources. In addition, if Chinese buyers can’t swap the U.S. cargoes, they still have to pay more for U.S. LNG due to the tariff.
However, China is thought to have mostly procured all its needed LNG supplies for the coming winter.
The costs and the impact on Chinese buyers would be mostly determined by weather and by how tight the Chinese natural gas market will be this winter, Giles Farrer, Research Director, Global Gas and LNG Supply at Wood Mackenzie, told CNBC.
While buyers face higher prices, LNG sellers will benefit from those higher prices, reaping more revenues thanks to the Chinese tariff that will prompt non-U.S. LNG sellers to lift prices.
Suppliers of LNG, such as U.S. Cheniere and traders like Vitol or Trafigura, stand to benefit from the higher LNG prices, although Chinese importers are said to have already started to shun U.S. LNG shipments, the majority of which come from Cheniere’s Sabine Pass.
China was the second-biggest buyer of U.S. LNG in the 12 months to June 2018. But after the trade war began in earnest, Chinese buyers began to cut purchases of American LNG, according to WoodMac.
“The impact on the short term market is likely to be less than we previously indicated. This is partly because the level of the tariff is lower than initially proposed, 10% now vs 25% in August, but also because we think China has already completed the majority of its procurement for winter,” Wood Mackenzie’s Farrer said in September when China announced the 10-percent tariff.
Should China still need more spot cargoes for the winter, supply from Australia’s East Coast, Indonesia, or Qatar could cost Beijing up to 10 percent more, but Chinese buyers could be limited in their ability to pay for the higher priced non-U.S. LNG by the price at which they can sell that gas domestically, Farrer said.
Apart from swapping U.S. LNG cargoes, Chinese buyers have another option to procure spot cargoes without having to pay the 10-percent tariff—buying U.S. LNG from European utilities which are reselling imported LNG from the United States on the Asian markets, where prices are higher than Europe’s.
China would thus avoid the 10-percent tariff, because once U.S. LNG enters European storage tanks (either for use in Europe or resale in Asia), the gas is no longer considered U.S. gas, Katie Bays, head of energy and industrials at Height Capital Markets, told CNBC.
Due to the Chinese tariff, the LNG market is currently a great place to be for sellers and traders, while it’s a tough market for buyers, Bays said.
The trade war is already influencing global and regional LNG trade, routes, and prices just as the northern hemisphere prepares for winter. How China will be affected and whether it has shot itself in the foot by slapping import tariffs on U.S. LNG will become clearer when the winter season and peak natural gas demand hit.