China and the US are not heavily reliant on one another for LNG, and the impact of US tariffs on LNG trade flows has so far been limited, according to S&P Global Commodity Insights.
Over the past three years, US LNG has supplied just 4.4% of China’s total LNG imports. In the recent escalation, China has not imported any US LNG for more than 60 days.
But in a recent webinar, the US market intelligence provider warned that if the tariffs stand-off persists pressure will increase on both parties as long-term agreements will begin to be affected.
Lunjia Li, China gas expert for S&P Global Commodity Insights, said the first trade conflict in 2018–19 lasted for 18 months, until the two nations reached the phase one deal agreement which eventually led to tariff exemptions for US LNG.
“However, the situation is different this time as Chinese buyers currently hold much more contracted US LNG compared with the first trade conflict,” she said. Currently Chinese buyers hold 21 contracts with US producers, representing 25.6 million tonnes a year – and are forecasted to exceed 14 million tonnes by 2027.”
“With the elevated project costs associated with the tariffs and supply chain disruption, there is a risk that final investment decisions [FIDs] for new US LNG projects could be delayed or even cancelled,” she said. “So this might result in a tighter LNG market in the coming years.”
Source: S&P Global Commodity Insights
She said around 8 million tonnes of China’s contract volumes backed by US projects have yet to reach FID.
“Meanwhile US LNG developers may shift their focus to Europe and other Asian markets in the hope of securing more long-term buyers and increasing their gas exports.”
First quarter international gas prices went through “significant ups and downs”, ranging between $11 and $17 per mmbtu. The fluctuations have been exacerbated by the new US tariff policy.
Chinese goods exporting to the US now face 145% tariffs while US exports to China face additional tariffs in the region of 125% to 140%. As a result, US LNG will face a total tariff of 165% when entering China, which includes a 25% tariff from the 2018–19 trade conflict.
However, the short-term impact is limited, as most cargoes are traded on a ‘free on board’ basis under destination-free contracts, which can ‘swap out’ and divert to other markets.
Source: S&P Global Commodity Insights
Megan Jenkins, a specialist in APAC LNG for S&P Global Commodity Insights, stressed that even before the tariff spat Chinese LNG demand has been weak.
“Chinese demand growth for LNG actually turned negative in the last two months of last year, declining about 9% year-on-year – which grew to a 24% decline in the first three months of this year,” she said.
“LNG volumes will be the supply source that [is] squeezed the most – it’s the most flexible and also the most expensive,” she said. “These volumes can be easily swapped out – and there is a market in Europe that will take them very quickly. There will be some improvement but overall we’re still expecting a year-over-year decline.”
Global LNG supply is forecasted to grow around 32 million tonnes this year, with 21 million tonnes originating from the US – and most cargoes are heading to Europe.
“Europe will be needing a lot more LNG this year compared with last, as it has lost Russian pipe gas flows that previously went through Ukraine, and European storage levels are lower than they were last year,” she said.
Source: S&P Global Commodity Insights
Jenkins said there would be a “gradual requirement” to have US LNG exported by US-built vessels and fees imposed on Chinese ships. Only around 7% of the global LNG tanker fleet has been built in China.
“There’s definitely a softening of the stance,” she said. “But it adds a degree of risk to US projects.”
While the near-term impact is minimal, prolonged high tariffs and impending LNG oversupply would present market challenges.
“In [such a] case everyone’s margins will be pressurised and it might be harder to swap out these cargoes,” she said.
