China-US Trade War Unlikely to Impact LNG: WoodMac

In response to Washington’s recent announcement of tariffs on $50bn of Chinese imports, Beijing has come out with its list of US products that will attract 25% additional tariff. LNG has not been included in the list and is expected to remain outside the bounds of any additional tariff, said Wood Mackenzie June 18. 

In terms of energy, the list from the Chinese government includes nearly all commodities covered by Chapter 27 of the Harmonised System of customs codes. This chapter covers mineral fuels, mineral oils, bituminous substances, and mineral waxes. LNG has not been included in list of goods that will face tariffs as the list jumps from code 27109900 (waste oils) to 27111200 (liquefied propane), excluding 27111100 (LNG). Natural gas in a gaseous state (27101210) is however included but of no significance given China cannot import pipeline gas from the US.

“The exclusion of LNG is not surprising for two key reasons. Firstly, LNG demand is growing rapidly in China. Secondly, the US will be the key source of incremental supply growth in 2018 and 2019. The trade war between China and US is at a nascent stage with an uncertain extent or duration. However, LNG is clearly seen as an essential good by the Chinese government. Given this, in the event of an escalation, LNG is likely to remain outside the bounds of any additional tariffs,” said Nicholas Browne, head of Asia-Pacific gas and LNG, Wood Mackenzie.

Beijing’s coal to gas switching policy in 2017 led to a very tight winter gas market and gas shortages in northern China. LNG played a key role in limiting the extend of shortages and LNG demand grew by record 12 million metric tons in 2017 to reach 38mn mt. US LNG met 4% of China's LNG demand in 2017, according to Browne.

Browne said that LNG demand in China in 2018 is expected to reach 49mn mt, as the coal to gas switching policy continues. According to WoodMac, LNG demand in 2019 is expected to reach 58mn mt. “We forecast that US LNG will account for 30% of incremental global LNG supply growth this year and 45% in 2019,” said Browne.

Earlier this year, CNPC signed a pair of long-term deals with Cheniere, one of which starts in 2018. According to Browne, for flexible US volumes, the introduction of tariffs would have posed a significant challenge for Chinese buyers as they seek to meet surging demand and would also have created logistical headaches for suppliers to optimise their portfolios to ensure they could meet Chinese demand while redirecting US LNG to other markets.