Asia winter LNG price trends ease short-term US export concerns over tariffs
Houston — Current winter pricing trends and the prospect for greater demand overseas are blunting concerns about short-term global market impacts from China’s 10% tariffs on imports of US LNG, Morningstar said in a report Thursday. Wider spreads between Henry Hub and Platts JKM prices for the winter months than at the same time last year suggest an even more bullish outlook for US exporters if temperatures turn colder for an extended period in Northeast Asia, analyst Matthew Hong said. Coupled with strong demand for LNG in Europe, the market could see greater competition as sellers are presented with more options for their exports, Hong said. Long-term, concerns remain that the escalation of trade tensions between the US and China will cause some US developers to delay final investment decisions. “One silver lining is that global LNG trade is still fairly young, and the lower position of the US on the production cost curve provides its exports additional advantage compared with competitors,” Hong said. “Nevertheless, uncertainty in the future direction of the U.S/China trade war will factor into which LNG projects investors look to develop in the future.” In August, when China first threatened tariffs on imports of US LNG, Beijing had vowed to set the duty at 25% if the US imposed a 25% tariff on $200 billion worth of Chinese products. That caused anxiety in the market and prompted Chinese buyers that had secured US LNG for delivery this winter to mull contingency plans for rerouting shipments if necessary. Ultimately, President Trump moved forward with his promised tariffs, but China set its duty on US LNG at only 10% starting September 24. Spot month price spreads between JKM, the benchmark price for spot LNG in Northeast Asia, and Henry Hub have widened significantly since April, sitting slightly above $8.00/MMBtu as of early this month, Hong said. While a 10% tariff delivered into China would add an additional $1.055/MMBtu to the landed price, it is likely the seller would swallow this premium, he said. “In any case, the spread is easily wide enough to absorb the tariff without impacting overall supply,” Hong said. “In fact, high demand worldwide means the spread has not been this wide since the 2017/18 winter months, when China experienced natural gas shortages from unexpected weather-related natural gas demand — and we are only just entering the winter season this year.” Wildcards include how long the tariffs on US LNG last and whether China at some point decides to increase them. FUTURE UNKNOWNS The biggest losers from the tariffs could be the US developers of second wave projects that are banking on Chinese foundation customers to finance construction of their terminals. With LNG Canada making a positive FID this week on its export project in Western Canada, that will put more pressure on US developers to make decisions sooner rather than later, with 2019 shaping up to be a make-or-break year for some. The push from LNG buyers for more flexible contract terms from exporters could add more risk to the LNG exports value proposition, and that may add uncertainty for the market, S&P Global Ratings said in a report Wednesday. “These increasing risks could mean that liquefaction sponsors will have to provide more equity or take on more balance sheet risks at the sponsor level in making final investment decisions,” the ratings agency said.