China-US trade tensions have continued to escalate with Trump having stated that a further USD16bn of tariffs will be implemented over and above the USD34bn already implemented in July. The US has also threatened a further USD200bn in tariffs. China has responded with a further USD60bn in proposed tariffs.
China’s proposed tariffs include adding US LNG imports to a list of goods incurring a 25% tariff. As of 2017 China was the world’s second largest LNG importer at 39mt (GIIGNL data) behind Japan at 83.5mt, although the European region imported 45.9mt. Importantly, China has been a key area of growing demand. According to S&P Platts, for the January-July 2018 period China imported 1.88mt of LNG from the US, already ahead of 2017 imports. While these figures are currently small the US is looking to significantly ramp up LNG exports to China with US LNG nameplate capacity forecast to reach 67mtpa as projects come on-stream by the end of 2019. Platts estimate that China’s LNG demand will reach 68mtpa by 2023.
In the event of tariffs being implemented, China should be able to source additional volumes from suppliers in Australia, Russia and Qatar, all of which have LNG capacity expansion coming on stream. Moreover, lower costs could make supply from these countries more compelling. It remains unclear to what extent European demand (as an alternative buyer for US LNG) will increase as Russian piped gas to Europe is extremely competitive from a pricing point of view and US LNG cargoes to Europe have so far remained small. But Trump’s meeting with European Commission President Jean Claude Juncker in July agreed to boost energy co-operation and Juncker noted in a statement yesterday: ‘The European Union is ready to facilitate more imports of liquefied natural gas from the U.S. and this is already the case as we speak. The growing exports of U.S. liquefied natural gas, if priced competitively, could play an increasing and strategic role in EU gas supply’.
Qatar is the largest global exporter of LNG (77.5mt in 2017) 7.69mt of which went to China in 2017. Going forward, it looks likely to benefit from China’s growing LNG demand with additional capacity planned: Qatargas is looking to ramp up production from ~77mtpa to 100mtpa by 2023. Given this backdrop, we continue to like Qatari sovereign and related names with exposure to the strategically important LNG sector which also screens attractively on our valuation models.