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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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China Blinks First In LNG Face-Off With U.S.

Amid the ongoing trade war between the U.S. and China, it seems that Beijing may be getting the short end of the stick already. On Sunday, the People’s Bank of China said it was cutting the reserve requirement ratio for most banks by 100 basis points, which will result in an injection of 750 billion yuan ($109.2 billion) in cash into China’s banking system. The move is intended to provide easier lending and more liquidity in China's economy as the impact of U.S. sanctions start to hit manufacturing and the overall economy.

Not business as usual

Several analysts are claiming that the ratio move shows China is getting nervous about a protracted trade war with the U.S. However, if China is getting the jitters, the official tone coming out of Beijing is more stiff lipped defiance. The government claims in a 71-page paper that it’s not afraid of a trade war and that its economy is “heavily resilient.”

Fraser Howie, an independent analyst and China watcher told CNBC on Monday that "China is probably facing its worst period since the global financial crisis.”

“All news is against it,” he said. "They certainly want to play down any talks of panic or near panic ... but they're clear it's not business as usual in China.”

Bloomberg News said in a report that the Bank of China move was understandable as a short-term response to a more challenging growth environment, but it risks being another attempt to crank up an old economic- model whose effectiveness has declined and whose unfavorable side effects could increase. The bank move also could be a preemptive step to avoid massive outflows of investor money from its financial system if the trade war continues.

Blinking (twice)

On the energy front, China has already blinked, maybe even twice. First, it conceded in August by removing U.S. oil imports from a list of possible duties. Two months earlier, China - perhaps trying to either intimate U.S. oil producers (who have been largely supportive of Trump’s policies thus far) who would in turn pressure President Trump, or either by pressuring Trump directly, indicated it would levy a 25 percent duty on U.S. oil imports.

Related: “Profit Secrets of the World’s Most Successful Energy Investors”

Since China is the largest buyer of American crude, Beijing likely discarded one of its strongest bargaining chips in the trade war so far. Some reports claim that U.S. oil imports to China are worth $8 billion all by themselves, so erasing oil from the tariff list reduced the value of sanctioned goods by roughly one-third.

As far as Beijing’s LNG tariff threats are concerned, the reduction from an earlier 25 percent duty to 10 percent could also be considered another blink on China's part. Beijing, though it does have a host of other gas and LNG suppliers, at the end of the day still needs American LNG as the country continues to pivot away from dirtier burning coal needed for power production in favor of cleaning burning natural gas. By 2020, per government mandate, gas is earmarked to make up at least 10 percent of China’s energy mix, with further earmarks by 2030.

Moreover, Being's 10 percent duty on U.S.-sourced LNG will merely see that cost passed onto China's state-run oil majors, while also increasing revenue for LNG sellers, including American LNG exporters.

Tariffs will also increase the price of LNG in Asia as producers and traders in the region will likely increase LNG on the spot market (which China needs to fill gaps in winter supply) to prices just under U.S. LNG prices with the tariff cost added in. Complicating the matter further, the 10 percent LNG retaliatory tariff comes just before winter when LNG demand is set to increase, and customers are already vulnerable to price hikes for the cleaner burning fuel.

Energy consultancy Wood Mackenzie estimates that China will need to buy about 8 million tons of LNG on the spot market, where commodities are purchased for immediate delivery or shipment in the near future CNBC, citing analysts, claims that Chinese LNG buyers will also try to swap as many LNG cargoes as possible to avoid the 10 percent tariff, but if they can’t swap cargoes they will be stuck paying the 10 percent duty.

As other LNG producers take advantage of China’s 10 percent tariff increase and hike LNG prices, the markup could add another $4 million to $5 million on LNG cargoes for Chinese buyers, Wood Mackenzie added.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on October 09 2018 said:
    Your claim that China blinked first in LNG face-off with the US is a plain lie based on twisted logic and ignorance of the global energy market and global geopolitics.

    Let me reply to your article point by point. How could the announcement by the Bank of China that it is cutting the reserve requirement ratio for most banks in order to inject cash into China’s banking system be different from the US Federal Bank raising the rate of interest in order to control inflation and attract investment to the United States. The Chinese Bank's move is a normal economic measure intended to provide more liquidity in China's economy and is not the result of US tariffs on the Chinese economy.

    As for the escalating trade war between the US and China, China will never turn the other cheek to America. It will retaliate tit for tat against any new US tariffs and US oil shipments are not immune from Chinese tariffs.

    If China was hindered by rising US tariffs from selling $800-billion worth of goods annually in the US, it can sell them somewhere else as its economy is far more integrated than the US economy in the global trade system supported by its silk and belt road initiative.

    The US on the other hand may have to replace Chinese imports with more expensive imports from elsewhere. This will lead to rising costs for US customers, higher inflation, widening budget deficit and rising outstanding debts by at least 2.35%. In other words, the US will be the eventual loser in a full trade war with China.

    President Trump should by now realize the futility of escalating trade war against China. It is a war he can’t win. He will eventually be forced to cut his losses by bringing to an end his trade war with China.

    The author’s claim that China has already blinked twice in relation to US oil and LNG imports is not correct. US oil exports to China are so minuscule that they hardly figure in a volume of trade amounting to $800 bn of Chinese exports to the US. Again, China’s reduction of the earlier 25% tariff on US LNG imports to 10% is just because it needs all the LNG it could get its hand on as it moves away from coal to the cleaner gas. Still, China could in a second stop any US oil and LNG imports and replace them with Iranian light oil imports and LNG from Qatar, Australia, Russia and Malaysia respectively. So I don’t recognize any Chinese blinking in either score.

    However, China has the upper hand when it comes to US sanctions on Iran’s oil imports. China could singlehandedly nullify US sanctions on Iran by importing the total oil exports of Iran amounting to 2.125 million barrels a day (mbd) and paying for them in petro-yuan. Moreover, the petro-yuan has made the US sanctions useless and has provided an alternative way by which Iran could bypass the petrodollar and the sanctions altogether.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Tony on October 10 2018 said:
    @Mamdouh G Salameh

    "If China was hindered by rising US tariffs from selling $800-billion worth of goods annually in the US, it can sell them somewhere else as its economy is far more integrated than the US economy in the global trade system supported by its silk and belt road initiative."

    This is a common but also commonly flawed assumption. In order for China to offset the hindrance of rising US tariffs on $800 billion of goods, several things have to happen in other parts of the world in order for the Chinese to sell the difference 'somewhere else'. One of the following would have to happen.

    1. The population in other parts of the world would have to increase by 325 million(population of the US) relatively quickly.

    2. The existing population would have to increase their annual income and purchase more than they do now. For example, China would have to make a case for you to buy two screwdrivers instead of one. But what if you only need one screwdriver? Perhaps the Chinese can convince you to buy three screwdrivers for the price of two? Basically, the assumption that China can just sell 'somewhere else' implies an gluttonous lifestyle.

    3. Developing countries along OBOR would have to be developed exceptionally fast like be fully developed in less than 10 years where its population has any worthwhile earning power to buy Made in China which is extremely unlikely to happen. Countries of early OBOR projects are have trouble pay their debt.

    As far as LNG, is this not a global commodity essential to oil or soybean? These 'products' are globally traded and essential in all countries. No producer is not going to produce more simply because China needs it. They will take advantage of China to sell to them at inflated cost at the opportunity. They will not produce in excess in order to keep prices up. Commodities and their prices will simply reshuffle and their prices will meet global equilibrium where they can make a profit and cover well over their operating costs.

    "President Trump should by now realize the futility of escalating trade war against China. It is a war he can’t win. He will eventually be forced to cut his losses by bringing to an end his trade war with China."

    The US economy is currently running on all cylinders. It is running so exceptionally well that Obama is currently campaigning for his Party calling it an 'economic miracle' creating over 200,000 jobs per month since Trump's inauguration. Obama is telling us to 'HOLD UP' reminding us that this economic miracle is an 'Obama economy' lest we make the mistake that Trump's tax overhaul, skyrocketing DOW and NASDAQ, and the trade war with China had anything to do with it. Most of Chinese exports into the US are non-essential items that can still be made cheaply in trade friendly countries. It can get its electronics from Japan or SKorea and it's clothes from southeast Asian countries. Under Trump, we are currently witnessing the mass migration of the Chinese supply chain to more parts of the world for non-essential goods. Trump is very well on the way to winning the trade war and even Obama is taking credit for it. That says a lot.

    China could nullify US sanctions against Iran but the question is would they? After all, Chinese companies that do business with Iran are not immune to being sanctioned and locked out of the US financial system themselves.
  • Null on October 10 2018 said:
    Check out the stock market. Hardly soaring.
  • Tristan Season on October 11 2018 said:
    It is not blinking. It is about firing shots, and small battles of a trade war, such as Trump's USD 12 billion aid to US farmers, a defensive act due to trade war.
  • Dan on October 13 2018 said:
    The last 5 things I bought in the U.S. were made in China.I don't think they are hurting too much otherwise they wouldn't need the LNG. They would have a glut already.

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