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China keeps LNG off tariff list for now

Beijing wants to have enough gas supplies for its households but may include it if trade row worsens


CHINA'S omission of liquefied natural gas (LNG) from its vast list of US products that face hefty import duties from Friday has preserved a potential weapon should the trade war with Washington deepen.

It also underscores Beijing's desire to ensure supplies of gas as it pushes to switch millions of households and businesses away from using coal as a key part of its 'war on pollution'.

China will on Friday impose tariffs on US$34 billion of US goods from pork to soyabeans to cotton in retaliation for a similar move by Washington as trade relations sour between the world's top two economies.

"If the (trade) war escalates, (I expect) the government will not hesitate to add LNG," a state oil and gas company executive said, declining to be identified due to the sensitivity of the issue.

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Although US LNG supplies to China have so far been tiny in volume and value compared with the around US$12 billion per year of US crude that arrives in the country, analysts say those levels could be set to shoot up as Beijing forges ahead with its battle to clear its skies.

Morgan Stanley has estimated annual Chinese imports of US LNG could rise to as much as US$9 billion within two or three years, from US$1 billion in 2017. The amount could be even larger if Washington resolves a logistics bottleneck.

That would go a long way to helping balance China's trade surplus with the United States, a major bugbear for Washington in the trade dispute.

But the strategy also hands Beijing another weapon in its arsenal if the spat deteriorates further. China's Commerce Ministry did not immediately respond to requests for comment.

However, some industry sources said the country would feel the impact of any increased tariffs on US LNG, as there is a limited number of major alternative suppliers.

"If we impose tariffs on US LNG, we pay a much higher opportunity cost," Mei Xinyu, a researcher at a think tank affiliated with the Commerce Ministry, told Reuters.

"It is easier for China to switch into other suppliers in the soyabean market. Duties on soyabeans hurt the US more, but duties on energy products would hurt both sides."

At a meeting between the government and China's three oil and gas majors ahead of the US president's visit to the country last September, the companies underlined that China would have limited alternative sources for LNG imports, an official from one of the firms told Reuters.

"The conclusion at that time was that US oil is not competitive," the official said. "In the gas market, we don't have much choice, mainly Qatar, Australia and the US."

And China is eager to avoid any repeat of last winter's gas crunch, when plunging temperatures drove people to crank up their heating amid the moves to turn away from coal.

Domestic natural gas demand rose 17.6 per cent in the first five months of 2018, way above government forecasts of an annual growth rate of 7 or 8 per cent, data from the National Development and Reform Commission showed.

"With domestic gas production restrained, we need to expand imports to meet the target of having natural gas account for a 10 per cent share of the energy consumption basket," said Wang Haohao, gas analyst with Zibo Longzhong Information Group.

"We need US LNG out of energy security considerations," she added. REUTERS

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