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Morningstar | China Adds LNG to Potential List of 25% Tariffs, Introduces Uncertainty to LNG Market

In response to U.S. President Donald Trump's recent threat to boost tariffs on Chinese imports, China has proposed that it could add liquefied natural gas to a list of products with a 25% tariff. The list is not yet final, so it is possible that it could be removed. The impact on this shift on Cheniere Energy and Cheniere Partners should be low, but it introduces uncertainty into a market that needs a high level of confidence in the market to pursue 20-year contracts. Signing new contracts for U.S. LNG export terminals and exports will be challenging given the uncertainties over price, which introduces delays. We plan to maintain our fair value estimates and wide moat ratings. Currently, Cheniere has two agreements with China National Petroleum for about 1.2 million tons per year for 25 years, and the agreement was used to help initiate a final investment decision for its Train 3. Cheniere also has been selling LNG to China via the spot market.

We do expect the short and long-term impacts to be muted. In the short term, we don't expect anything to change, as U.S. LNG will be routed to different countries and then China. Over the long run, we don't think China will change its pivot toward gas over coal as a feedstock for both environmental and cost reasons. In an effort to improve the environment and reduce the usage of dirtier coal, China's Thirteenth Five Year Plan has set the goal of making natural gas 10% of the country's energy mix by 2020, which would imply double-digit growth rates over the next few years. On a mmBtu basis, our long-term price deck of $10.34 for Brent and $3 for U.S. Henry Hub, implies a 70% cost savings on the actual feedstock.

We would expect more of an impact over the long run if another country other than the U.S. had the ability to significantly increase natural gas production, as this would represent competition for U.S. gas. As it stands, the U.S. is not the lowest cost gas on the global cost curve, but because it can add so much supply over the next five to 10 years at a low cost, it is highly attractive to refineries that want to switch from more expensive feedstocks based on coal or oil.