Market implications of Chinese tariffs on US LNG

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Today China announced retaliatory tariffs on $60 billion worth of American imports, in response to the Trump administration's latest trade threats. The list included a 25% tariff on LNG.

Commenting on the announcement Giles Farrer, research director global gas and LNG supply, Wood Mackenzie, said:

"In the short term, in a tight winter market, the tariff would likely raise LNG prices. Chinese buyers would bear the burden of the tariff because there is enough demand outside of China for US LNG.  Meanwhile, the impact on Chinese gas demand is likely to be limited as Chinese end user pricing is not related to LNG pricing.

"Therefore on stream and under construction US LNG would not be adversely affected. US LNG, with a tariff, would become the marginal supply source into China. Chinese buyers could face a situation where non-US suppliers, including portfolio players, could capture a larger margin if the Chinese buyer's alternative includes the tariff.  This would have knock-on impacts to the rest of the market."

"Long-term market consequences are likely to be felt on new supply developments as it would restrict the target market for developers of new US LNG projects trying to find new long-term contracts. However, as plenty of appetite exists from other buyers in Asia and Europe for second wave US LNG projects, this is unlikely to be terminal. The first wave of US LNG projects were successful despite not signing contracts with Chinese buyers.

"It could also support development of other projects outside of the US targeting the Chinese market, potentially allowing them to push for higher long-term contract prices. For existing US China LNG SPAs that have yet to start, the Chinese buyers are still signed up for volume "

According to Wood Mackenzie, in the 12 months to June 2018, a total of 42 cargoes were exported to China, roughly 3 million tonnes, all of them from Cheniere's Sabine Pass terminal on the U.S. Gulf Coast. In this period, China was the second biggest export market for US LNG after South Korea. Shell was the biggest supplier of US LNG to China.