Business

Breathing easy in Beijing may get pricier as Xi targets U.S. LNG amid trade row

Bloomberg

Chinese President Xi Jinping’s trade policies are threatening to make his environmental goals more costly to meet.

The world’s biggest gas importer on Friday included U.S. liquefied natural gas on a list of goods that could be hit with a 25 percent duty. While no date has been set to implement the tariff, the announcement comes just a few months ahead of winter, when Chinese demand for the U.S. heating fuel is likely to peak.

That Chinese policymakers would now take aim at U.S. LNG, which had been missing from previously targeted goods, signals that Xi may be willing to suffer some pain in order not to back down from President Donald Trump’s escalating trade dispute. His government’s clean-air push has made China the world’s largest buyer of natural gas, and erecting barriers to U.S. supplies could force the country to pay a premium this winter.

“China imposing tariffs on LNG imports from the U.S. marks a shift in strategy, but this action is more likely to hurt Chinese buyers than U.S. exporters,” Katie Bays, an analyst with Height Securities LLC in Washington D.C., said in an emailed note. “Chinese buyers will pay a higher price for their imports.”

A fuel clash between the U.S. and China is a sharp turnaround from last year, when Trump’s visit to Beijing included pledges by state-run companies to support U.S. export projects. China National Petroleum Corp., the country’s largest gas supplier, in February signed a 25-year deal to buy U.S. LNG, with some of that supply expected to start this year.

Logical Fit

The LNG synergies between the two countries seem perfect. Xi’s push to cut smog led to policies forcing homes and factories to scrap coal boilers and burn cleaner natural gas. Meanwhile, excess supply in the U.S. has some analysts predicting the country is on track to become the world’s largest LNG exporter.

The U.S. plays a relatively small role in China’s overall gas balance as the country gets most of its imports via pipeline from Central Asia or from LNG heavyweights like Qatar and Australia. But gas demand in China peaks in the winter, when home heating use spikes, and the nation relies on LNG imports for quick injections of supply.

That’s where U.S. supplies fit last year. Unlike most sellers, U.S. companies including Cheniere Energy Inc. don’t restrict where their cargoes can be delivered. That means traders like Royal Dutch Shell Plc can buy U.S. LNG and redirect it to where demand, and price, is strongest. China imported more than 900,000 tons of U.S. LNG in the last three months of 2017, more than in the first nine months combined.

“U.S. LNG volumes make up about a quarter of spot traded volumes today, meaning that they are a key mechanism for meeting seasonal demand,” Bays said.

Tariffs would make U.S. supplies uneconomical to China, so traders would shift cargoes around to send U.S. fuel to other buyers like Japan and South Korea while redirecting non-U.S. fuel to China, Trevor Sikorski, an analyst with Energy Aspects Ltd. in London, said in a note last month.

“Chinese buyers could face a situation where non-U.S. suppliers, including portfolio players, could capture a larger margin if the Chinese buyer’s alternative includes the tariff,” Giles Farrer, research director for global gas and LNG supply at Wood Mackenzie Ltd., said in an emailed note. “This would have knock-on impacts to the rest of the market.”