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    From the editor: Sino-US trade tensions threaten US LNG exports [Gas in Transition]

Summary

Slapping tariff increases on one of your largest trading partners is rarely good for business and the US gas industry must hope there is no blowback in terms of LNG exports to China.

by: Ross McCracken

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From the editor: Sino-US trade tensions threaten US LNG exports [Gas in Transition]

Back in 2018, as then-president Donald Trump tussled with China over trade, Beijing put a 10% tariff on US LNG imports, later raising it to 25%, a move which cast a shadow over US LNG investment plans at the time and saw Chinese imports of US LNG slump. As the US increased its trade measures, China also placed tariffs on propane, crude oil and methanol, as well as a number of non-energy goods.

In the run-up to this November’s presidential election both US candidates are going all out to demonstrate their desire to protect domestic industry from Chinese imports. President Joe Biden has increased tariffs on $18bn of imports from China under Section 301 of the Trade Act of 1974. Trump has responded by saying that, if elected, he would set tariffs at 60% or more on all Chinese imports. 

China, it seems, is paying the price of winning blue collar votes in America’s industrial heartlands.

Beijing’s response so far has been muted, announcing an investigation into imports of polyoxymethylene copolymer, a plastic used in electronics and cars. China’s government knows there is an election at stake, and there are alternative routes into the US market.

China also needs LNG. Chinese LNG imports stood at 6.22mn tonnes in April, up a substantial 31.5% year on year. From January to April, imports were up 22.7%. The strong increase in LNG demand reflects signs of economic recovery, which will be further boosted by Beijing’s announcement in May that it will provide nearly $42bn in cheap loans to state companies to stabilise the country’s housing crisis. 

China’s property market problem will not be resolved overnight, and a lack of domestic demand provides part of the explanation for China’s massive export push, which has heightened trade tensions not just with the US, but other major trading partners such as the EU. 

Yet, despite promising domestic economic signals, Beijing still faces a lower growth path in coming years. The International Monetary Fund predicts China’s real GDP growth will reach only 4.6% this year, falling to 4.1% in 2025 and just 3.3% by 2029. 

The outlook for natural gas demand, however, is substantially better. ETRI, CNPC’s economic and technology research institute, sees an increase of 6% this year to 416bn m3. LNG imports are expected to rise by 8.1% to 77.11mn t. The January-April data suggests this forecast might be exceeded. Chinese regasification capacity is expected to grow by a record 60mn t/yr to 176mn t/yr this year.

Although there are many factors at play, most forecasts for China’s longer-term LNG demand remain buoyant. Consultants Wood Mackenzie, for example, sees China importing over 120mn t/yr by the mid-2030s, citing the country as a key source of global LNG demand.

 

Trade contradictions

Europe’s energy crisis has dominated demand for LNG since Russia invaded Ukraine, but that effect is starting to recede. As Europe is now dependent on LNG for its baseload consumption of gas, it can no longer play the role of swing consumer to the extent it did before. Its policy settings imply a reduction in gas demand over the next decade and beyond as it pursues its net zero ambitions. 

In the brief period between Trump’s trade war with China and the invasion of Ukraine by Russia in late February 2022, which saw the diversion of US LNG to Europe, US LNG exports to China jumped. They reached almost 1.5bn m3 in August 2021 alone, more than a sixth of total US LNG exports that month. 

This and more, rather than dependence on European demand, should be regarded as the long-term normal in the US LNG sector’s growth calculations.

China is already the largest LNG importer in the world and its importance will only increase as it takes a net zero pathway predicated on displacing coal use with a combination of gas, renewables and nuclear power. US-Chinese trade in LNG should therefore be a match made in heaven. The ratcheting up of Sino-US trade tensions threatens what should be a mutually beneficial relationship. 

Moreover, China has alternatives. Qatar, which is also undergoing a major expansion of its liquefaction capacities, would be a prime beneficiary of barriers to Sino-US LNG trade, as would other LNG producers, which potentially face a softening of prices and stiff market competition as new US and Qatari LNG capacity comes onstream. 

China’s gas pipeline suppliers, notably Russia, would rub their hands at the prospect of a Chinese LNG market lacking US imports, while Europe would welcome a continued surplus of Atlantic basin LNG supply. Almost everyone would win . . . except the two protagonists. 

 

Sacrificial lamb?

Large though it is, a problem for the US LNG sector is that it is only a small part of the US’ overall trade relationship with China, and a small part of both sides’ election calculations. 

Trump’s twin policy stance of ‘drill baby drill’ and tariffs on Chinese imports makes little sense to the gas sector, because, if the US is going to drill, then it will need somewhere to sell, and China is both the biggest export market and the one with the most growth potential. 

Biden’s contradictions are equally apparent, but less fundamental. Despite the environmental agenda, US gas production and exports have thrived under his watch. Putting a spanner in the works via the agency of Chinese-US trade tensions would keep gas very cheap in the North American market and cap the sector’s expansion, which is increasingly export-dependent. Biden has already, albeit ever so softly, got the gas sector in his sights with his pause on new LNG export approvals. 

Although raising the heat in trade tensions with China is, to a degree, an attempt to steal Trump’s thunder, it could work out well for Biden, if it serves to burnish his environmental credentials further down the line.