More U.S. LNG cargoes head for China as demand notches up

Monday, 04 May 2020
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As China returns to work and energy demand recovers, four U.S. LNG cargoes are en route to Chinese import terminals. Two cargoes are seen heading for Tianjin and analysts suspect the buyers are CNOOC or Sinopec, which are likely to use part of the regasified LNG for power generation.

The first cargo has arrived at Tianjin on April 29, our LNG Unlimited shipping tracker shows. Delivery of four further cargoes is imminent and will mark the first successful shipment series of LNG from the United States to China in more than a year.

Economics of U.S. LNG imports to China have only become attractive again after Beijing conceded to remove the 25% tariff in February. In the face of the covonavirus crisis, the Chinese government announced it would enable buyers to apply for tariff exemptions on 696 types of goods, including LNG. Chinese buyers seeking exemptions from the additional tariffs were advised to submit their application from 2 March, with any exemption granted reportedly valid for one year.

Suppliers fiercely compete on cost

“Still, even with tariff exemptions in place, we believe U.S. LNG would still be more expensive than gas currently available at around $3/mmBtu on the Asian spot market,” commented LNG Unlimited data analyst, Alex Wilk. It is questionable, however, if Chinese buyers can take advantage from cheap spot prices since much of their supply is locked into long-term contracts, particularly with Australian suppliers.

Latest price data published by China’s customs authority indicates the country’s landed LNG price averaged $8.85/MMBtu in March. In Wilk’s view, “U.S. LNG thus still stands a chance of being profitable if costs are managed carefully and LNG remains tariff exempt in China.”

At the same time, Gazprom is supplying cheap pipeline gas to northern China through its recently opened ‘Power of Siberia’ pipeline. The Russian gas giant agreed to supply 4.6 billion cubic meters (Bcm) through the new interconnector in 2020 and ramp the volume up to 16 Bcm by 2022.

Beijing lowers industrial gas prices

As China strives to rekindle its economy, after strict lockdowns in January and February, the government in Beijing lowered gas prices for industrial users. Transport and logistics constraints are also being lifted quickly.

However, these policies are deemed “insufficient to stir a lost-demand recovery and new coal-to-gas switching.” Despite a gradual resumption in economic activity, Wood Mackenzie estimates a full-year gas demand reduction of between 6 Bcm and 14 Bcm in 2020, translating to a 4% to 6% growth in gas demand this year. 

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