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China likely to reduce near-term spot US LNG imports on tariff uncertainty: sources

Singapore — China's possible introduction of a 25% tariff on US LNG imports will likely deter spot procurement of US volumes in the near term, several Chinese end-users and suppliers said Monday.

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The commerce ministry said Friday it may impose 25% tariffs on US LNG cargoes if President Donald Trump follows through on his recent threat to escalate the trade dispute with Beijing that he initiated.

Chinese end-users told Platts that, if implemented, the tariffs would push the cost of US LNG above what companies could afford for spot cargoes in the near term.

China's share of uncontracted demand

"[A] 25% [tariff] is not something we can absorb even if domestic demand is strong," said a source at a state-owned Chinese company. "So while this uncertainty persists, I doubt buyers will be buying a lot of spot US LNG."

Privately-owned LNG buyers concurred that they would be deterred from buying US LNG in the near term if the tariff was enacted.

"It is impossible for private companies like us, the 25% hike completely eats away our margin," an LNG buyer said.

Another Chinese end-users commented that a potential 25% tariff, combined with the current 10% VAT cost, would add over a third to procurement costs for Chinese buyers.

China has already seen a decline in its US LNG volumes recently, importing only four cargoes over June and July, compared with five cargoes in May alone.

The country imported more than 1.88 million mt of US LNG over the January-July period, compared with 1.61 million mt in all of 2017, S&P Global Platts Analytics data showed.

Even if import levies are not introduced immediately, the uncertainty of a tariff threat could prompt importers to halt LNG volumes altogether, or to resell them to other countries.

Platts earlier reported that China's Unipec resold a significant portion of its June-loading US crude oil cargoes after Beijing announced in mid-June that it was considering imposing a 25% import tariff on US crude.

China received 14.65 million barrels of US crude in June, which was a historical high, but volumes more than halved to just 6.9 million barrels in July, according to S&P Global Platts trade flow software cFlow.

Related video:

SPOT LIQUIDITY, TALKS COULD BE IMPACTED

The uncertainty of a steep tariff on US LNG imports to China may also alter spot market trading behavior and limit liquidity in the near term as buyers may seek to exclude US cargoes from their bids, sources said.

"If I were a Chinese buyer or with significant China positions, then yes I would want that clause [which excludes US volumes]," a Singapore-based trader said.

"It could be catastrophic if there wasn't a clause and... China implements the tariff," he added.

The limited amount of flexible destination LNG volumes available could present a problem for China if it needed to access the spot market in a significant way during the winter, according to Jeff Moore, manager of Platts Asian LNG Analytics.

"With US cargoes 'off-limits', it will limit liquidity for offers for delivery into Northeast Asia, which are oftentimes allocated for delivery into Japan, South Korea or Northeast China," Moore said. "We could see options become less flexible for buyers if the tariffs are enacted," he added.

Outside of the spot market, one international trader said that there will be uncertainty over a recent contract signed by PetroChina with Cheniere to purchase approximately 1.2 million mt/year of LNG, with a portion of the supply beginning this year.

"If [PetroChina] pays the additional tariff, then [there's] no issue... but [term] negotiations with other US term supplier will slow down," the source said.

--Kenneth Foo, kenneth.foo@spglobal.com

--Staff, newsdesk@spglobal.com

--Edited by Alisdair Bowles, newsdesk@spglobal.com