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China's Tariffs on U.S. LNG Mean Nothing, Everything

China's decision to hike import duties on U.S. liquefied natural gas (LNG) is a move that means very little for the market in the short term, but it has the potential to deliver outsized consequences the longer the levies remain in place.

As part of its latest round of retaliatory tariffs on U.S. imports, Beijing increased the duty on LNG shipments from 10 percent to 25 percent.

This will make it even more uneconomic for Chinese buyers to purchase LNG cargoes from the United States. The 10 percent tariff put in place last year has already devastated the trade, with China's imports of the fuel dropping sharply.

China imported 25 U.S. LNG cargoes in the first half of 2018, and this slipped to just eight in the second half, according to vessel-tracking data compiled by Refintiv.

This year, a mere three cargoes have been delivered, one each in January, February and March, and no more are currently scheduled to arrive in the coming months.

This means in practical terms that raising China's import duty will have little impact on global LNG flows.

But there are certain to be longer-term consequences from the fastest-growing LNG market effectively locking out the world's fastest-growing supplier.

Much of the new LNG coming on stream this year and next is based in the United States, as companies rush to take advantage of the plentiful and cheap supplies of natural gas delivered by the nation's shale boom.

It's also worth noting that the United States is the dominant player in the next wave of LNG projects being planned around the world.

The United States currently has 64.2 million tonnes of annual LNG capacity under construction, the bulk of which will hit the market this year and next. Together with Canada, it also has a further 164.2 million tonnes in capacity for which the final investment decisions are due by the end of next year.

The market expectation is that China will overtake Japan as the world's largest LNG importer sometime in the next decade, even though its annual rate of growth will moderate from the breakneck pace of more than 40 percent for the past two years.

This means China will become the most important single player in the LNG buyers' market, just as it already is for several other commodities, such as iron ore, copper, crude oil and coal.

Both existing and emerging U.S. LNG producers won't want to be shut out of that market, but if the trade war continues for several years it's likely that some projects will struggle to secure the necessary financing to progress.

The longer the tariff war continues, the more the United States will hand advantages to new rival producers in countries such as Russia and Mozambique, and help make the business case for existing major producers such as Qatar and Australia.

TIME FOR OPTIMISM OVER?
The problem for many analysts across commodity, equity and other markets is that they are still working on the somewhat optimistic assumption that eventually a trade deal between the United States and China will be done.

This view is now being seriously challenged by reality, with the positive tones of the previous weeks giving way to the actual action of escalation.

In the end it will not matter much who sabotaged what parts of whatever deal the two sides were working on. What will matter is that the world's two largest economies seem quite prepared to play a game of brinkmanship with seemingly no end in sight.

The market consensus on the trade war may be shifting from the current position that it's a somewhat damaging but ultimately resolvable dispute, to a view that it is a long-term structural shift in trade dynamics that will have enduring negative consequences for the global economy.

Two of President Donald Trump's favourite types of businesses are oil and gas producers and coal miners, and it's worth noting that along with U.S. farmers they are bearing the brunt of the tariffs imposed by China.

China's imports of U.S. coal, which were subjected to a 25 percent tariff last year, have slumped but not completely stopped, with three cargoes due to arrive in May, up from two in April and matching three for March.

These are most likely cargoes of coking coal for making steel, and given that the export market for this high-energy coal is dominated by Australia, the United States and Canada, it limits the available alternatives.

China's imports of U.S. crude oil, which remain tariff free, have also fallen off a cliff, with just five cargoes being discharged so far this year, down from 53 cargoes in the first half of 2018.

The trade dispute has thus all but destroyed the one area where U.S. exports were actually growing rapidly and working to reduce the deficit that the United States has with China.

By Clyde Russell

May 14, 2019

 

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