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WoodMac on the latest US–China trade tariffs

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LNG Industry,

Nicholas Browne, Head of Asia-Pacific gas and LNG, has commented on China's retaliatory tariffs on US goods:

"In terms of energy, the list from the Chinese government includes nearly all commodities covered by Chapter 27 of the Harmonised System of customs codes. This chapter covers mineral fuels, mineral oils, bituminous substances, and mineral waxes. LNG seems to be clearly excluded from the list of goods that will face tariffs as the list jumps from code 27109900 (waste oils) to 27111200 (liquefied propane), excluding 27111100 (LNG). Natural gas in a gaseous state (27101210) is however included but of no significance given China cannot import pipeline gas from the US.

The exclusion of LNG is not surprising for two key reasons. Firstly, LNG demand is growing rapidly in China. Secondly, the US will be the key source of incremental supply growth in 2018 and 2019.

The success of China's coal to gas switching policy in 2017 led to a very tight winter gas market and gas shortages in northern China. LNG played a key role in limiting the extend of shortages and LNG demand grew by a record 12 million t in 2017 to reach 38 million t. US LNG met 1.6 million t or 4% of China's LNG demand in 2017.

With coal to gas switching continuing at a rapid rate, LNG demand growth in 2018 will be at least 10 million t to reach 49 million t. We currently forecast demand will grow an additional 9 million t in 2019 to reach 58 million t. We forecast that US LNG will account for 30% of incremental global LNG supply growth this year and 45% in 2019.

Tariffs on US LNG would increase costs and potentially limit availability of LNG. CNPC recently signed two long-term deals with Cheniere, one of which starts in 2018. For flexible US volumes, the introduction of tariffs would have posed a significant challenge for Chinese buyers as they seek to meet surging demand. It would also have created logistical headaches for suppliers to optimise their portfolios to ensure they could meet Chinese demand while redirecting US LNG to other markets.

The trade war between China and US is at a nascent stage with an uncertain extent or duration. However, LNG is clearly seen as an essential good by the Chinese government. Given this, in the event of an escalation, LNG is likely to remain outside the bounds of any additional tariffs."

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