Home / Shipping News / International Shipping News / US-China Phase-1 deal brings limited cheer for LNG shipping

US-China Phase-1 deal brings limited cheer for LNG shipping

With 25% tariff on LNG still in play, the Phase-1 deal between the US and China is not expected to bring any significant change in the LNG trade between the two countries. However, with China requiring additional LNG supplies in the coming years, the US still has the opportunity to become an important supplier for the soon-to-be world’s largest LNG market.

The US and China recently announced a Phase-1 deal to reduce the trade tensions between the two countries, wherein the latter pledged to purchase $200 billion worth of US goods, which includes $52 billion of energy products such as coal, crude oil, refined products and LNG.

The de-escalation in tensions marks a welcome step towards improving the global economy, which has suffered due to the trade dispute between the two large economies.

However, when it comes to LNG, the effect will be limited as China has retained its 25% tariff on US-sourced LNG. The tariff will critically restrict any development of LNG trade between the US and China, especially in the current market scenario where LNG supplies are abundant and prices are at an all-time low.

Asian LNG prices in January 2020 were below $5 per MMBtu and are projected to fall further, with additional liquefaction capacity coming online in 2020.

On the demand side, a mild winter and weakness in the global economy impacted LNG imports in Asian countries such as China, Japan and South Korea, resulting in a lower-than-expected demand growth.

In 4Q19, China imported an estimated 68% of its LNG from Australia, Qatar and Malaysia. The country has also been active in securing spot supplies, especially since the US-China trade dispute escalated in 2018. We believe the Phase-1 deal will not be enough to bring any significant change in China’s LNG import portfolio, with Australia, Qatar, Malaysia and Russia being the preferred options for the country currently.

China’s Shenergy recently signed a 12-year LNG supply deal for 1.5 mtpa with Malaysia’s Petronas staring from 2022. China has also invested in upcoming liquefaction projects in Mozambique and Russia, and signed subsequent supply deals with these projects.

That said, we estimate that China will require another 15-20 mtpa of LNG imports by 2024 in order to cater to its growing LNG demand, for which the US can play a major role, provided the tariffs are lifted. This scenario will be mutually beneficial for both the countries as China is projected to become the world’s largest LNG importer by 2022-23, while the US is also on the road to become one of the largest LNG exporters in the world after Qatar.

China reduced its LNG imports from the US since 4Q18 and has not imported any US LNG since 2Q19. The trade tensions had a minimal effect on LNG shipping demand initially as other Asian countries, such as Japan and South Korea, absorbed the diverted tonnage. However, demand has failed to rise in these Asian countries, which compelled the US to divert LNG cargoes to Europe, leading to lower vessel charter rates in 4Q19.

We expect a similar trend to ensue in 2020, with Europe absorbing a bulk of US LNG supplies. Meanwhile, Qatar, Australia and Russia will primarily focus on the Asian market, with lower LNG prices making them more favourable as compared with the US.

If the Phase-2 deal between the US and China goes through and the tariffs are lifted, we expect to see Chinese and US LNG companies coming together to fund the planned US liquefaction projects and sign long-term supply deals. It will also increase the LNG shipping demand and reduce the excess LNG supply in the market.
Source: Drewry

Recent Videos

Hellenic Shipping News Worldwide Online Daily Newspaper on Hellenic and International Shipping