China coronavirus force majeure option unsettles LNG market

Singapore — The Chinese government's decision to offer force majeure certificates to domestic companies if they are unable to meet their international contractual obligations due to the coronavirus outbreak has caused uncertainty in the LNG market.

The announcement by the China Council for the Promotion of International Trade has sparked questions among LNG market participants about the duration, details and market impact. CCPIT was unavailable for comment.

Some market participants said the measure could affect shipments due to arrive in February, others said it would apply until the outbreak was considered to have eased.

It was also what exactly constituted a buyer's "inability to fulfill their international contractual obligations."

A couple of Chinese end-users reported that while port closures had not been put in place for the most of the country, there were other circumstances under which they could declare force majeure -- regional quarantines could result in companies not being able to receive or transit goods, for example.

"Most contracts would include epidemics as one of the types of events in which a party could claim force majeure," a trader said.

Another source said LNG receiving terminals in the northerly Hebei region were already lowering their operating capacity, which might hamper offloading.

Some Chinese buyers pointed out that this move could provide some relief to end-users who had been struggling with high inventories even before the coronavirus outbreak.

LNG demand hit

China's demand for LNG spot cargoes is expected to take a hit as the end-users take a step back to assess the repercussions of the outbreak. Chinese national and provincial officials have mandated that commercial and public activities in several of the cities affected be shut through February 9, and even February 16 in some cities.

After an already warmer-than-average winter, China's purchases have been 17% lower than an earlier Platts Analytics forecast at 252 million cu m/d for January, with weak local demand leading to higher inventories at several LNG terminals belonging to large Chinese national oil companies. This has in turn led to several cargoes being delayed in discharging, and in some cases the cargoes being offered elsewhere on a prompt basis. Demand has since fallen further since the coronavirus outbreak.

Sources said one Chinese end-user had already submitted a claim for a force majeure certificate, but this could not be confirmed.

"Well, if they have the force majeure certificate, now is a good time to use it given the high inventory situation," a Pacific supplier said.

However, others have cautioned that this would very much be a last resort as doing so could strain relationships with some of their long-term suppliers, and if terminals could still accept the LNG, they would do so.