The promise of a surge of new US LNG export development thanks to government efforts to speed up permitting is threatened now that China has retaliated for Washington's escalating trade war with Beijing.
On one hand, easing regulatory burdens means developers of new liquefaction facilities can get approval to build quicker, but, on the other hand, they may not secure financing for the billions of dollars it costs for those facilities if tariffs prevent buyers from signing contracts.
The impact of those competing forces was brought into focus Monday when China raised tariffs on imports of LNG from the US to 25% from 10%, effective June 1. The action added to concerns that the protracted trade fight between the two important market players -- one that hopes to one day be the biggest exporter of LNG and the other that is expected to become the biggest importer of LNG within a decade -- could shift the global supply and demand picture heading into next decade.
Podcast: As US-China trade war widens, uncertainty weighs on commodity markets
"China tariffs on US LNG are definitely not a good thing for the US LNG export business, either for existing projects or for future ones, as they will obviously raise the cost of LNG imports from the US and, as a result, make them less competitive, particularly against other Atlantic Basin suppliers, such as Nigeria and Equatorial Guinea," said Madeline Jowdy, S&P Global Platts Analytics senior director, global gas and LNG.
In the short term, this will have an impact on Asian spot prices, making them higher due to inefficiencies involved in moving non-US sourced spot volumes to China, Jowdy said.
China's announcement was part of a wider increase in tariffs on $60 billion of products imported from the US, in response to the White House raising tariffs on $200 billion worth of Chinese goods last week, according to a statement from the State Council under China's Finance Ministry.
Shares of US LNG exporters and developers fell sharply in early afternoon trading in New York. Tellurian, developer of the Driftwood LNG export terminal in Louisiana, slid nearly 7%, while NextDecade, developer of the Rio Grande LNG facility in Texas, fell 4%. Tellurian declined to comment, as did Australia's LNG Limited, developer of Magnolia LNG in Louisiana. NextDecade and Cheniere Energy, the biggest US LNG exporter, did not immediately respond to messages seeking comment.
Higher tariffs on LNG may hamper further trade flows between the US and China as upcoming summer peak demand in North Asia could have raised prices enough to offset the previous 10% tariff and create arbitrage to boost US LNG imports into China. Chinese end-users have been turning away US-sourced cargoes since the 10% tariff on LNG went into effect in September 2018. Since then, market participants reported several resales or diversions of US-origin cargoes from China to other Northeast Asia countries by the state-owned national oil companies and their suppliers.
POSSIBLE EXEMPTIONS
Potentially blunting the impact of the tariff increase, China plans to conduct "trial exemptions" for US products on which additional tariffs had been levied in three batches since last year. LNG has a carve-out. But the bar the Chinese government set for exemptions is high, and Beijing will be under pressure to hold the line on tariffs since Washington has rejected many exemption requests from US companies seeking exclusions from earlier rounds of US tariffs.
LNG sector interests expressed varying degrees of concern.
"Hair on fire with regard to tariffs going from 10% to 25% is not how I would characterize most everybody who is involved in this market," said Fred Hutchison of LNG Allies.
With the destination flexibility of US LNG contracts and hundreds of LNG cargoes on the water at any time, there are ways to trade and swap the gas around, he said, potentially easing the short-term impact.
ON THE HORIZON
Still, swaps carry fees with them, which could raise the delivered cost of the LNG, Jowdy said. And Hutchison flagged longer-term concerns, urging both sides to return to the bargaining table.
"The issue that concerns us is that these are two of the largest players in the LNG market ... and anything that stands between the two continuing to work toward long-term relationships which permit greater capacity to be built in the United States is an opportunity lost," Hutchison said. Those concerns extend to Chinese companies considering long-term contracts or making equity investments in US projects. In addition, some US developers have considered sourcing some fabrication work for their facilities in China, he said.
Charles Riedl of the Center for Liquefied Natural Gas in Washington said "we are deeply troubled" and urged a quick resolution, warning that certainty is key for the US industry, where time lines are years long and investments are worth billions.
"Pricing US LNG out of a key market undermines its competitiveness and ability to reduce the US trade deficit while providing good jobs at home and growing the economy," he said.
