Tariff on US LNG will be Milder than Expected: WoodMac
The impact of 10% tariff imposed by Beijing on US LNG on Chinese LNG demand in the short-term is likely to be less than previously indicated, Wood Mackenzie said.
The trade war between the US and China escalated overnight September 17-18, with US president Donald Trump imposing, effective September 24, 2018, a 10% tariff on $200bn of imports from China and Beijing responding September 18 with tariffs on $60bn of US goods, including LNG imports.
“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,” WoodMac said.
In the 12 months up until June 2018, China was the second largest buyer of US LNG, accounting for approximately 3mn mt/yr of US LNG, with Shell being the largest seller, according to WoodMac. However, as the US-China trade dispute escalated, Chinese buyers have gradually reduced purchases of US LNG.
“If China still needs to procure spot cargoes, we think that this is likely to result in a premium of up to 10% on supply from non US, lean sources like the Australia East Coast projects, Tangguh, Gorgon or the Qatari Mega-trains. Chinese buyers' appetite to pay significantly higher prices for LNG from other sources may be limited by the price they can sell gas domestically,” WoodMac said.
In the long-term, however, the consequences are likely to be felt on new supply developments. It restricts the target market for developers of new US LNG projects trying to sign new long-term contracts. “However, there is still plenty of appetite for second wave US LNG projects from other buyers in Asia and Europe, as evidenced by recent contracting momentum at Freeport, Calcasieu Pass and Sabine Pass Train 6. The first wave of US LNG projects was successful despite not signing contracts with Chinese buyers,” WoodMac said.
WoodMac believes it could also support development of other projects outside of the US targeting the Chinese market (including Russia pipeline projects), potentially allowing them to push for higher long-term contract prices. The recent deal between PetroChina and Qatar is evidence of this.