January 16, 2020 / 11:32 AM / 12 days ago

Chinese demand for U.S. LNG unlikely to surge as long as tariffs remain

SINGAPORE (Reuters) - Chinese purchases of U.S. liquefied natural gas (LNG) are unlikely to surge, despite an agreement for China to buy more U.S. energy supplies, because tariffs on gas from the United States remain in place, analysts and traders said.

FILE PHOTO: A liquified natural gas (LNG) tanker leaves the dock after discharge at PetroChina's receiving terminal in Dalian, Liaoning province, China July 16, 2018. REUTERS/Chen Aizhu/File Photo

Under a Phase 1 trade deal between the world’s two largest economies signed this week, China has committed to buying an additional $52.4 billion worth of U.S. energy supplies, including LNG, over the next two years.

But a 25% tariff imposed by China on U.S. LNG, which has pushed the price of U.S. gas above the spot market and restricted purchases, remains for now while Washington and Beijing negotiate a Phase 2 trade deal.

“For China to massively increase imports of ... LNG from the U.S. while tariffs remain in place is going to be challenging,” said Gavin Thompson, Wood Mackenzie’s Asia Pacific vice chair.

China’s demand for LNG over and above existing contracts is expected to be about 15 million to 25 million tonnes a year over the next two years, according to analysts.

If China covered all of this demand with U.S. LNG despite the tariffs, that would increase Beijing’s purchases of U.S. energy by about $11 billion to $12 billion, or only 20 percent of the two-year target in the Phase 1 deal, analysts said.

“We expect the Chinese government to remove, reduce, or approve tariff exemption before incremental LNG imports from the U.S. can be meaningful,” said Jenny Yang, director of IHS Markit’s greater China Gas, Power, and Energy Future division.

If China were to buy far more U.S. LNG, importers would have to absorb the cost of the tariffs or pass it on to consumers, which could make Chinese state oil companies reluctant to commit to large-scale purchases, Wood Mackenzie’s Thompson said.

Even if tariffs were removed, U.S. LNG would still be about $1.50 to $2.50 per million British Thermal Units (mmBtu) more expensive than gas available in Asia, analysts and traders said, referring to Asian spot prices which are at seasonal lows.

The deal will, however, provide a boost to U.S. LNG projects under development and boost growth in overall Chinese demand, analysts said.

For now, several Chinese traders told Reuters they would be taking a wait-and-see approach instead of rushing into deals.

“I personally don’t think the U.S. will lower or significantly remove additional tariffs which means China may not cancel tariffs for U.S. LNG,” a senior LNG executive at a Chinese company said. “I don’t think anyone is in a position to have a deal quickly.”

Reporting by Jessica Jaganathan; Editing by David Clarke

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