Given the central role that both countries envisage for bilateral LNG trade in their national energy strategies in the years ahead, it was not entirely surprising that Beijing opted to exclude LNG from its threat to impose an additional 25% tariff on $50 billion worth of US goods, including energy and agricultural products.
LNG is playing an increasingly important role in China’s energy security. China surpassed South Korea as the world’s second largest LNG importer in 2017, its LNG demand is on track to hit 47 million mt in 2018 and could exceed that of Japan by 2030, as Beijing seeks to raise the proportion of gas in the country’s energy mix to 15%, according to S&P Global Platts Analytics.
China’s dependence on US LNG is also on the rise. This is supported by a ramp-up in US Gulf LNG production, declining supplies from Southeast Asian legacy producers and limited spot availability from eastern Australia, where rising domestic gas prices have created political opposition to LNG exports. China has imported around 1.61 million mt so far in 2018, almost as much as it imported in the full year 2017.
Meanwhile, rebalancing fundamentals in Asia Pacific have continued to push up prices, with the Platts JKM averaging nearly $9/MMBtu over January-May 2018, up from $6.5/MMBtu a year earlier. This has made inter-basin trade inflows from the Atlantic and the US Gulf Coast increasingly vital to meet Asia’s spot demand and balance regional fundamentals, especially over the peak winter demand period.
The US-China bilateral LNG trade not only plays a role in short-term fundamentals and supply security. Long-term energy agreements backed by Chinese companies have underpinned US LNG projects such as Cheniere’s Corpus Christi Train 3, Delfin floating LNG and the Alaska LNG project, and helped ensure additional LNG supplies are ready to come online as the LNG market marches towards a supply squeeze in the early-mid 2020s.
The trade war between the US and China escalated on Saturday with China threatening an additional 25% tariff on $50 billion worth of US goods, including energy and agricultural products, in response to President Donald Trump’s decision to place similar tariffs on the same annual value of Chinese product imports.
Among the $50 billion worth of US goods, the additional tariff on a total $34 billion worth of US agricultural products, cars and marine products are due to come into effect on July 6, according to an announcement by the Customs Tariff Commission of the State Council.
Additional duties on the remaining $16 billion of US goods, including crude oil, LPG, gasoline, naphtha, fuel oil and natural gas, will be announced at a later date.
The latest tariff threat between the two biggest economies comes less than a month after Beijing and Washington on May 19 inked an agreement to put the brakes on their trade dispute after China agreed to buy more US goods, key among them being LNG and crude oil.
US tariffs and China’s retaliatory rhetoric have emerged as a big risk for commodity demand and prices in 2018, alongside a slowdown in the Chinese economy and geopolitical uncertainty.