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US-China tensions cast shadow over bilateral LNG trade

Highlights

US-China LNG flows already constrained by weak markets

Chinese buyers unsure about applying for LNG tariff exemptions

China not on track to meet energy targets of Phase 1 trade deal: analyst

Singapore — Growing geopolitical tensions with Washington are making it tougher for Chinese LNG importers to commit to more US LNG cargoes at a time when US LNG is already difficult to bring to Asia due to uneconomic arbitrage and oversupplied Asian markets.

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This means that US LNG may not be able to take full advantage of the recovery in China's commodities imports, which were hampered for several months by coronavirus-triggered lockdowns, limiting its ability to meet the US-China Phase 1 deal's commitments.

Several analysts expect that China will not be able to meet its energy purchase targets under the Phase 1 trade deal, due to weak demand and low prices.

US LNG imports will not move the needle as much as crude oil, but some Chinese "good-faith" purchases could still continue.

The uncertainty has left China's three big national oil companies— China National Offshore Oil Corporation, or CNOOC, Sinopec and Petrochina--the main importers of US LNG, unsure of ramping up US LNG purchases.

These companies did not confirm applications for LNG tariff exemptions for coming months, and executives from the NOCs said they remained cautious about buying US LNG.

"What if the government suddenly increases the tax [tariff] rate?," a source from one of the NOCs said, while a CNOOC executive said if it were to apply for US LNG imports in advance, but is unable to do so due to market volatility, it would lose the government's trust.

"We can't predict how much US LNG will be imported in coming months....so we cannot apply for tariff exemptions in advance," the CNOOC executive said.

China LNG imports from the US

WEAK MARKETS

China resumed US LNG imports in April after stopping for a year, bringing in 218,323 mt or three full-sized cargoes.

In May, China imported seven cargoes and so far two US LNG cargoes are due for June, data provider Kpler said.

The surge in April and May was mainly because the US-North Asia arbitrage was open, a Singapore-based trader said, although other sources said that NOCs also saw the opportunity to meet Phase 1 deal targets.

China's import cost for US LNG for April delivery averaged $3.6/MMBtu, while Platts JKM averaged $3.1/MMBtu DES, which means spot procurement was cheaper than US LNG. But US LNG was cheaper than oil-linked volumes from Qatar and Australia at around $10.5/MMBtu and $8.3/MMBtu in April, customs data showed.

This huge price difference worked in favor of US LNG but it is unclear if the price economics can be sustained, especially with US cargo cancellations for June and July loading, and spot JKM at $2/MMBtu that makes US LNG uneconomic for the rest of the year, traders said.

Additionally, the Chinese have other options, and a domestic price war means even discounted US LNG will not be competitive, a market source in Zhejiang said.

US-China tensions are also pressuring the Chinese economy. Japanese bank Nomura said Beijing's response to recent US actions were restrained, but risks of a re-escalation are rising, especially beyond the scope of trade.

"The deterioration of US-China bilateral relations could be a substantial downside risk to China's trade, manufacturing investment, growth and of course, RMB in coming months," Nomura said.

PHASE-1 DEAL TARGETS UNACHIEVABLE

Under the Phase 1 deal, China agreed to increase imports of US energy products by $52 billion over two years, which implies $2.1 billion of purchases every month for 2020. For the first five months of 2020, China has imported just $0.6 billion in total, according to data from Bernstein Research.

"China is not on track to meet the target agreed upon as part of the US-China Phase 1 trade agreement, and it looks impossible for China to do so," Neil Beveridge, Hong Kong-based senior analyst at Bernstein, said in a webinar earlier in June.

"The recent pick up in China's energy import from the US could be a good faith effort from China to uphold the agreement but it looks too little, too late," Beveridge said, adding that the current run-rate of imports is a fraction of what is needed and the fall in commodities prices make the target even harder to reach.

Erica Downs, Research Scholar at the Center on Global Energy Policy, said in the same webinar that Phase 1 targets looked ambitious when the agreement was signed, and they look even more ambitious today, given the COVID-19 pandemic and the collapse in commodity prices.

"Over the remainder of 2020, I do think we will see more Chinese purchases of US LNG," Downs said, adding that it's in China's interest to keep the agreement in place and not rip it up. "And so there is going to be, I think, a good-faith effort to buy more LNG."

It remains to be seen if this will translate into larger trade flows.