China’s tariffs on US Liquefied Natural Gas to have long-term impact
China’s decision to hike import duties on US 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 outsised consequences the longer the levies remain in place.
As part of its latest round of retaliatory tariffs on US imports, Beijing increased the duty on LNG shipments from 10 per cent to 25pc.
This will make it even more uneconomic for Chinese buyers to purchase LNG cargoes from the US. The 10pc tariff put in place last year has already devastated the trade, with China’s imports of the fuel dropping sharply.
China imported 25 US 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 US, 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 US is the dominant player in the next wave of LNG projects being planned around the world.
The US 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 164.2m 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 40pc 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 US 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 US will hand advantages to new rival producers in countries such as Russia.