China imposes retaliatory tariff on US LNG

China implemented a 10% tariff on US LNG on 24 September 2018, as part of a ‘tit-for-tat’ trade war between the two nations. It is proposed the tariff will increase to 25% from the start of 2019 unless the two countries agree a deal. So far, the US has imposed three rounds of tariffs on Chinese products this year, totalling $250bn worth of goods.

In essence, President Trump has imposed the US tariffs in a bid to end what he has called the ‘unfair transfers of American technology and intellectual property to China’ and to protect US jobs. The tariffs, in theory, will make US-made products cheaper than imported ones, thereby encouraging consumers to buy American, boosting local businesses and supporting the national economy. However, in reality, many US companies and industry groups have said that their businesses are being harmed.

Commenting on the news, Giles Farrer, Research Director, Wood Mackenzie, says: ‘In the 12 months up until June 2018, China was the second largest buyer of US LNG, accounting for approximately 3mn t/y of US LNG, with Shell being the largest seller. However as the US-China trade dispute escalated, Chinese buyers have gradually reduced purchases of US LNG.’

‘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 versus 25% in August, but also because we think China has already completed the majority of its procurement for winter. Possibly because of this, we have recently seen spot and futures prices for winter come down despite strengthening oil prices.’

‘If China still needs to procure spot cargoes, we think that this is likely to result in a premium of up to 10% on supply from non-US, lean sources like the Australia East Coast projects, Tangguh, Gorgon or the Qatari mega-trains. Chinese buyers’ appetite to pay significantly higher prices for LNG from other sources may be limited by the price they can sell gas domestically.’

He continues: ‘For the long-term market, the consequences are likely to be felt on new supply developments. It restricts the target market for developers of new US LNG projects trying to sign new long-term contracts. However there is still plenty of appetite for second wave US LNG projects from other buyers in Asia and Europe, as evidenced by recent contracting momentum at Freeport, Calcasieu Pass and Sabine Pass Train 6. The first wave of US LNG projects was successful despite not signing contracts with Chinese buyers.’

‘It could also support development of other projects outside the US targeting the Chinese market (including Russia pipeline projects), potentially allowing them to push for higher long-term contract prices. The recent deal between PetroChina and Qatar is evidence of this.’