By Irina Slav
Growing U.S. liquefied natural gas (LNG) supply could find its perfect demand match in China’s soaring LNG demand and imports. If it weren’t for the U.S.-China trade war, that is. I
Just a year ago, American LNG exports to the fastest-growing demand market, China, were rising and on track for further growth for years to come. Then the trade war began, China slapped a 10-percent tariff on American LNG, and U.S. gas exports to the Chinese market began flowing in fits and starts.
A trade deal between the world’s two largest economies would make America the single largest LNG supplier of China by 2025, Morgan Stanley said in a report cited by Bloomberg. Moreover, if trade hostilities end, the U.S. could cut its trade deficit with China by US$17 billion a year thanks to LNG exports. China will also win from a trade deal—it could save US$1.8 billion on its annual energy import bill.
Morgan Stanley’s base case scenario is that the U.S. and China will reach a deal on trade this year. Should this be the case, American LNG will account for 21 percent of all Chinese imports of the super-chilled fuel by 2025, compared to just 5 percent in case of a no-deal.
If there’s a trade deal, the U.S. will be the top supplier of LNG to China with a 21-percent share, ahead of Russia with 18 percent, Australia with 14 percent, and Qatar with 6 percent, according to Morgan Stanley estimates.
However, in a no-deal scenario, Russia, Australia, and Qatar would all outstrip America in China’s LNG imports, with Russia becoming the single top supplier with 27 percent, followed by Australia with 17 percent and Qatar with 8 percent, while the U.S. would sit at just 5 percent.
A U.S.-China trade deal will also give more certainty to American LNG developers to approve and invest in new export projects to meet the surging demand in China.
Right now, in a no-deal situation and with American LNG coming at a 25-percent tariff in China as of this month, there’s growing uncertainty among U.S. LNG developers because China is shunning American gas and is staying away from signing long-term contracts or investing in U.S. LNG projects.
This wasn’t the case before the trade war began last summer.
Between the start of the first U.S. LNG exports to the world in February 2016 and end-December 2018, China was the third-largest buyer of American LNG behind South Korea and Mexico, with a total of 62 cargoes accounting for 10.7 percent of all U.S. LNG exports, U.S. Department of Energy data shows.
This year in March and April, no LNG cargoes have gone to China, according to Refinitiv Eikon shipping data cited by Reuters.
Currently, the 25-percent tariff on Chinese imports of American LNG “takes US LNG firmly off the table,” Gavin Thompson, Vice Chairman, Energy – Asia Pacific at Wood Mackenzie, wrote this week.
“Chinese buyers like the flexibility of US LNG and an opportunity to build Henry Hub into their portfolios to keep them competitive as the domestic gas market opens. For US projects, China is all about scale, a promised land. But without progress on trade talks, this just isn’t going to happen,” Thompson says, wondering if LNG could be the “olive branch” in the trade dispute.
“China and the US don’t compete strategically on LNG; they complement one another. The combination of rising Chinese demand and US supply should be a win-win,” WoodMac’s Thompson noted.
LNG trade could be a win-win scenario for both the U.S. and China, if only they reach a trade deal soon, analysts concur.
The prospects of such a deal, however, have become increasingly difficult to predict. Just two months ago, a deal appeared to have been all but signed. But the talks collapsed in early May, intensifying fears that the global economy will significantly slow down in the face of an ugly and protracted trade dispute.
“I think that we’ll end up making a deal with China. We have a very good relationship, although it’s a little bit testy right now, as you would expect,” U.S. President Donald Trump said on Wednesday.
President Trump and Chinese President Xi Jinping could discuss the trade war at the G20 summit in Osaka, Japan, on June 28 and 29, but expectations are low for any meaningful outcome from a possible bilateral meeting.
Still, a trade deal would be a win-win for U.S. LNG exports and for Chinese LNG imports, and for reducing America’s trade deficit with China.