Singapore — The latest flare up between Australia and China has ensnared more commodities but the likelihood of LNG being impacted is relatively low, despite vulnerabilities stemming from an oversupplied market and China's growing options for gas imports, experts said.
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In the past week, China suspended Australian beef imports and threatened tariffs on Australian barley, which was unexpected due to ongoing meat shortages and food security issues in China after its recent lockdown.
The contractual nature of LNG trade and energy security concerns protect LNG from being on the receiving end of China's predilection for using trade to lash out, but market participants aren't discounting the possibility either, wary of heightened uncertainties due to the pandemic.
While LNG from free-market economies like Australia and the US were initially marketed as free of geopolitical risk, unlike disruption-prone supply from the volatile Middle East, the "molecules of US freedom" rhetoric has shown that there is no such thing.
The key questions now are whether the Australia-China trade spat will escalate, and will seaborne LNG get embroiled in the dispute.
"This move to put tariffs on Australian barley is an escalation, clearly linked to Canberra's advocacy for an international inquiry into the origins of COVID-19, but it isn't the first such move," Ian Hall, Professor of International Relations at Australia's Griffith University, said.
"I think we can expect more punitive actions targeting particularly sensitive products, including wine and agricultural produce, as Beijing tries to create divides between the business community and the politicians and bureaucracy in Australia," Hall said.
He said there were no signs that Canberra intends to fold and political support has certainly shifted to a harder line, alarmed by Beijing's regional ambitions and growing influence in Australian society.
"COVID-19 has heightened this anxiety. The business lobbies are still heard, of course, as they should be, but there are questions being asked about their past and present influence over China policy," Hall said, adding that business complaints about Canberra's handling of diplomatic ties are being met with more skepticism.
LARGEST TRADING PARTNERS
China is Australia's largest trading partner and the largest market for its exports, accounting for 31% of Australia's total exports in the fiscal year 2017-18, according to the Australian government's parliamentary report in July 2019.
Iron ore and coal are Australia's two biggest exports, natural gas is the fourth-largest, with the top ten also comprising gold, aluminum ores, beef and crude oil. A lot of this goes to China.
Australia's reliance on China as a commodity buyer has turned into a strategic risk factor and the rhetoric could worsen especially if Australia continues to side with increasingly toxic accusations from the US, Henning Gloystein, Director for Energy, Climate & Resources at risk consultancy Eurasia Group said.
"In the end, however, I suspect Australia will gradually back down its rhetoric and China will limit its actions to measures that have more signal power than deep impact," Gloystein said, adding that targeting LNG would be a significant move.
"That said, a few signal moves across several commodities, perhaps combined with some calls to reduce Chinese investment into Australia, will be felt and may achieve the goal of Australia quietly backing down," he added.
So far LNG has been immune.
"There is certainly no sign so far of reduced Australian shipments to China," Graeme Bethune, head of Australian energy consultancy EnergyQuest said, adding that Australia delivered 40 cargoes to China in April, up from 36 in April 2019.
"I don't think LNG cargoes to China are likely to be affected to any material extent due to political factors although total shipments could fall for commercial reasons," he said. Bethune said it was also notable that the Arrow Energy development, in which state-run PetroChina has a 50% stake, just received the go-ahead, indicating normal investments.
LNG IS AN EASY TARGET
What may fly under the radar is how easy it has become for China to find gas supply alternatives between an oversupplied LNG market, pipeline imports, growing domestic production and slower demand growth.
In fact, Citigroup's research director Anthony Yuen has argued since late 2019 that China's LNG imports could peak in the early 2020s because of these reasons.
He said China's domestic gas demand slowdown will be exacerbated in 2020 due to pandemic lockdowns, with full-year growth of just 4%, and pipeline gas imports will grow faster than LNG imports this year.
"If Australia/China relations deteriorate to the extent of an outright trade war between the two in which China completely shuns Australian goods, then I don't think any company in Australia has a mitigation strategy. But I think this would hurt Chinese importers just as much," Eurasia Group's Gloystein said.