Houston — China rattled investors in the US LNG export sector when it said Friday it may impose 25% tariffs on American cargoes if President Donald Trump follows through on his threat to escalate the trade dispute with Beijing that he initiated.
Chinese demand figures to underpin a substantial chunk of the expected US export capacity growth over the next decade, as the country is forecast to soon overtake Japan as the world's biggest LNG importer.
Cheniere Energy holds the only major firm long-term sales agreements announced so far between a US exporter and a Chinese buyer. More commercial deals with China will be needed to finance projects under development. Tariffs could make those contracts more expensive, prompting Chinese buyers to seek supplies from elsewhere. US spot cargoes also would be at risk of being priced out of the market.
"I think the US can compete, but this is a potential issue for some facilities depending on their cost structure," Brad Leach, an energy market consultant in Connecticut who was formerly responsible for natural gas and electricity research at exchange operator CME Group, said in a telephone interview.
US exporters and developers were muted in their response to the announcement from China's Customs Tariff Commission of the State Council, with many preferring to take a wait-and-see approach about whether the tariffs would actually happen.
"We will continue to work with Chinese buyers," LNG Limited CEO Greg Vesey, whose 8 mtpa Magnolia LNG project is being proposed for Lake Charles, Louisiana, said in a statement. "This is positive from the aspect that we considered it part of the tariff list all along and maybe now this gets everyone to the negotiating table to find a mutually beneficial solution. Chinese buyers and US exporters want this resolved."
Vesey told S&P Global Platts in June on the sidelines of the World Gas Conference in Washington that an interested Chinese buyer was holding off completing a purchase agreement for Magnolia capacity until there is greater certainty about tariffs.
Tellurian, whose Driftwood LNG terminal also is proposed for Louisiana, questioned the logic of the Chinese tariff threat. Its shares fell 5.6% to close at $7.58 in Friday trading in New York.
"American gas doesn't come with a 'Made in America' label on the molecules," co-founder Charif Souki said in an email. "I'm not sure how a tariff on a commodity works, but we are watching in fascination. This will not affect the trade but will simply make gas more expensive to Chinese consumers." CHENIERE CROSSHAIRS The greatest immediate impact from Chinese tariffs on US LNG would be on Cheniere. It has shipped dozens of cargoes from its Sabine Pass terminal in Louisiana to China on a spot basis, and it has two long-term sales agreements with state-owned China National Petroleum Corp. that supported its decision to build a third liquefaction unit at its Corpus Christi, Texas, facility. Cheniere stock fell 2% to close at $62.06/share.
"While we are waiting on details of the recent announcement and do not view tariffs as productive, Cheniere continues to see China as an important growth market and LNG as a 'win-win' between the United States and China," the company said in a statement.
In a July 24 interview, CEO Jack Fusco acknowledged the uncertainties created by trade tensions between the US and China and reiterated how important the Chinese market is to Cheniere's growth plans.
A spokeswoman for Dominion Energy, which operates the Cove Point LNG export terminal in Maryland, said in an email that "any tariffs imposed will not affect" its customer contracts. To date, none of the cargoes shipped from Cove Point under long-term agreements with Gail India and a joint venture of Sumitomo and Tokyo Gas has been delivered to China. Dominion stock rose 1.4% to close at $72.12/share. TRUMP TRIP Just nine months ago, President Trump visited Beijing, where he urged a stronger trade relationship with China and touted a series of preliminary agreements that were signed between US LNG exporters and Chinese buyers.
One involved the proposed Alaska LNG project, although it wasn't guaranteed. Alaska Gasline Development said in an email it believes the current trade tensions "will be resolved well in advance of Alaska LNG" exports to China.
Since the November trip, Trump has imposed tariffs on imports of some goods from China, and recently he said he would explore the possibility of expanding those duties with a 25% tariff on $200 billion worth of Chinese products.
The latest threat prompted China's action Friday. It said it has added US LNG to its list of products liable to a potential 25% import tariff if the US follows through.
In June, in a earlier retaliatory move, China announced an additional 25% tariff on $50 billion worth of US goods, including energy and agricultural products, but LNG was not on the list. MARKET FUNDAMENTALS
China has imported more than 1.25 million mt of US LNG so far this year, compared with 1.61 million mt in all of 2017, behind Mexico and South Korea, S&P Global Platts Analytics data showed.
China became the largest contributor to global LNG consumption growth in 2017. It surpassed South Korea as the world's second-largest LNG importer and its share of global LNG demand is expected to rise to the same level as Japan's by 2030.
"All parties need to keep these fundamental facts in mind as they work through the present difficulties, which have nothing to do with energy trade between our two nations," said Fred Hutchison, executive director of industry trade association LNG Allies.
In a note to clients, Wood Mackenzie's research director of global gas and LNG supply, Giles Farrer, said the tariffs, if implemented, will have considerable short- and long-term implications for both the US and China.
"In the short term, the tariff would likely raise LNG prices," Farrer said. "Long-term market consequences are likely to be felt on new supply developments as it would restrict the target market for developers of new US LNG projects trying to find new long-term contracts." -- Harry Weber, Robert Perkins and Sapna Dogra, firstname.lastname@example.org
-- Edited by Brandon Evans, email@example.com