US-China tariff standoff reshapes Chinese LNG strategy, threatens industrial demand

The ongoing trade tensions between the US and China over tariffs have not only forced Chinese LNG importers to overhaul their procurement strategies and absorb higher import costs, but have also cast a shadow over the country's industrial natural gas demand, according to industry and trade sources.

A series of tariff impositions between the world's two largest economies is expected to impact global LNG trade flows, with China needing to find ways to swap or resell its over 4 million mt/year of US LNG supply in the market this year.

"China is currently able to swap out its US LNG contracts because the volumes are manageable and the spot market is favorable," said Eric Yep, principal analyst of First Take Gas at S&P Global Energy.

"However, it still needs significant engagement with traders and portfolio players, likely at some servicing cost. And in the coming years, if spot prices were to drop sharply, swapping out Henry Hub-linked LNG could become increasingly difficult," Yep added.

Platts, part of Energy, assessed JKM -- the benchmark price reflecting LNG delivered to Northeast Asia -- for June at $11.129/MMBtu on April 25. The Henry Hub natural gas price for June was $3.074/MMBtu as of 4:30 pm Singapore time on the same day, according to CME data.

Chinese LNG importers have sold their US volumes in the international market, instead of bringing them back to China, to avoid the high tariffs after Beijing first imposed retaliatory tariffs on US LNG in February.

A trader from a Chinese national oil company confirmed that they sold an April-loaded US cargo and replaced it with a non-US-origin shipment, leveraging flexible FOB (free-on-board) terms that allow buyers to redirect cargoes.

"Chinese offtakers, including both NOCs and second-tier companies, are preparing for this risk and have started discussions with portfolio players about longer swap structures," Yep said.

"This provides certainty on US cargoes for the portfolio players, and the Chinese offtakers don't have to worry about swaps every passing month. Reselling larger US contracts may require permission from the original supplier, but traders and portfolio players don't raise any major counterparty risk," he added.

Surplus supplies

The surplus of US supplies has recently contributed to a decline in Asian LNG prices. On April 24, the Platts June JKM was assessed at $11.18/MMBtu, down 42.3 cents/MMBtu, or 3.6%, day over day.

During the physical Platts Market On Close assessment process the same day, five of the 13 offers originated from US base-load ports, including the Freeport, Cameron and Sabine Pass LNG terminals.

While some cargo swap operations have not yet incurred additional costs, discussions about adding exclusion clauses for US-origin cargoes have emerged in the market, according to trade sources.

Some sellers were said to be offering a premium of 30-50 cents/MMBtu to include such clauses, while trade sources in Singapore suggested that a range of 10-30 cents/MMBtu is more reasonable.

"We haven't seen any exclusion clauses among Chinese companies yet, as they can somewhat avoid this by utilizing the JKTC [Japan-Korea-Taiwan-China] diversion. However, as demand for non-US cargoes increases, such clauses may be added in future contracts," said a trade source with one Chinese LNG importer in eastern China.

"Discussions on exclusion clauses are still very preliminary. Chinese buyers understand that opting for such clauses may come at a premium, especially if they wish to secure volumes in advance. However, purchasing prompt cargoes offers more certainty regarding the cargo source, which could command a lower premium," a Singapore-based trade source said.

Chinese buyers remain cautious in the Asian spot market, which is believed to be dampened by potential additional costs for non-US-origin LNG cargoes and weak domestic demand, according to trade and industry sources.

"Incorporating a clause to exclude US cargoes at this point could result in a spread of around 30 cents/MMBtu compared with DES JKTC cargoes, which is why we haven't planned any purchases yet," the trade source in eastern China said.

Alternatives

In addition to swapping US cargoes in the spot market, trade sources are also considering the possibility of conducting swaps through term contracts.

"If the spot market cannot accommodate such a large demand for cargo swaps, we would opt to sell the US cargoes through term contracts," the NOC trader said.

Before the tariff conflict between the US and China, one of the US LNG contract holders, Hong Kong-listed China Gas, carried out a long-term cargo swap operation to replace part of its US supplies in October 2024.

China Gas and Vitol signed an agreement for a long-term swap arrangement, under which Vitol will purchase 500,000 mt/year of LNG from China Gas' contracted US volume on an FOB basis and sell 500,000 mt/year of LNG to China Gas on a DES basis starting in 2029.

China's LNG imports from the US -- its fifth-largest supplier in 2024 -- halted completely in March due to the tariff dispute.

Simultaneously, LNG imports from Indonesia surged to a 38-month high in March, doubling year over year and increasing 80.2% month over month, positioning the country as China's third-largest supplier, according to Chinese customs data.

Recent reports indicated that Russian LNG supplies also rose, although their competitiveness against pipeline gas remains uncertain. An industry source said that part of the increase was likely due to the need to replace US cargoes.

These developments suggest that Chinese buyers are shifting their demand for US LNG to other countries.

Impacts

As tariffs between the US and China rose to as high as 245% in April, the two countries effectively entered a state of trade disruption, with noticeable impacts on China's industrial demand starting to surface.

While China's industrial demand remains resilient for now, the tariffs are expected to gradually reduce natural gas consumption, putting 1 Bcm of demand at risk, according to industry sources.

"We are currently witnessing significant effects on export orders from the Pearl River Delta. Downstream demand in South China dropped around 18% year over year in the first quarter," said a source with one of the major gas distributors in China.

Although news of tariffs has contributed to a downtrend in JKM, there is growing pessimism among Chinese buyers regarding the economy and market conditions, according to trade sources.

"Despite offers for spot LNG as low as the low $11[/MMBtu] range in the Asian market, Chinese buyers are still unable to accept these offers due to the prevailing bearish sentiment, particularly driven by tariffs," the gas distributor source said.