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 slapping a 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. Related: Oil Prices Rise On Iran, Hurricane Outages
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.
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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.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More
Comments
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 its losses by bringing to an end its trade war with China.
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 entire 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 already made the US sanctions useless and has provided an alternative way by which Iran could bypass the petrodollar and the sanctions altogether.
Therefore, a bit of humility and less daydreaming are urged on Ms Paraskova before publishing such a misleading title for its article.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
let see how it play out.
for the LNG..USA WILL BE THE LOSER.even the trade war too.
do you think only the USA has the capacity..
lets see if it does..May be it is time to stop USA goods entering china altogether.press ahead with export ban of specific item.
COMPONENT of us made content can be slap with tax of say 25-50%..killing the suplly chain.LNG is a vast market.can buy from russia.why not construct LNG pipe line.buy from africa.venezuala..who else. why not put a total ban on US LNG to prove it.who is to loose.