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Four U.S. LNG cargoes en route to China

Subsequent to the SK Resolute’s departure from Cameron LNG for China, three more vessels – the Hoegh Giant, the Cool Explorer and the Palu LNG – are now also en route. If completed, these trades would mark the first U.S. LNG exports to China in more than a year whilst fierce competition and the Petronet force majeure weigh on Asian spot prices.

Following reports of the SK Resolute having left Cameron LNG with a cargo headed for Tianjin in China by 29 April, there was excitement that U.S. LNG may restart efforts to gain a sustained foothold in one of the world’s fastest growing energy markets.

Since the SK Resolute ‘outing’ three more vessels have revealed destinations in China

Indeed, our LNG Market Tracker identified two additional vessels over the weekend – the Cool Explorer and the Hoegh Giant – where the captain’s destinations show as Tianjin and China with arrivals scheduled for 24 April and 5 May, respectively.

The SK Resolute departed Cameron LNG on 22 March whilst the Cool Explorer and the Hoegh Giant sailed from Sabine Pass LNG on 26 and 27 March, respectively.

Early morning on Tuesday, the Palu LNG also changed its destination to Tianjin with scheduled arrival on 21 April. The vessel departed Corpus Christi LNG on 25 March.

Total and Naturgy as well as CNOOC and Sinopec likely among trading parties

Based on our database of charter parties, we believe the SK Resolute is carrying a cargo sold by energy major Total whilst the Hoegh Giant is facilitating a trade supplied by Spanish LNG portfolio player Naturgy. Considering the captains’ destination of Tianjin, the buyers are likely to be CNOOC and/or Sinopec – provided neither vessel is diverted along the way. We also consider PetroChina a possibility, since its Caofeidian (Tangshan) terminal is very close to the Tianjin municipality and shares shipping channels with the other two terminals.

The charter and trading arrangements surrounding the Cool Explorer and the Palu LNG are more opaque, but we think the buyer may turn out to be the same as for the other two cargoes.

Long route via South Africa avoids Panama Canal fees

The SK Resolute and the Hoegh Giant embarked on the long route to China around the Cape of Good Hope and onwards through the Strait of Malacca instead of traversing the Panama Canal, a move we assume is aimed at keeping costs as low as possible. Both vessels were built in 2017 and are more efficient than many of their older counterparts, capable of absorbing some of the boil-off gas as fuel, and thus provide additional scope for charter cost savings to help make the two long-haul trades commercially viable.

Chinese January commitment to buy more U.S. energy initially did not coincide with tariff reduction

The protracted two-year long trade war between the United States and China that has constrained trade between the two countries received a silver lining in January this year, when the two rival powers struck an agreement whereby China committed to buy around $26billion in U.S. energy products in 2020.

Under the so-called Phase 1 trade deal, China agreed to buy an additional $52.4 billion worth of U.S. energy supplies, including LNG, over the next two years.

Punitive additional tariffs have hitherto rendered U.S. LNG commercially unattractive in China

We and others have maintained that since the deal did not formally remove tariffs from LNG, a surge in U.S. LNG supplied to China was highly unlikely. Under the tariff regime at the time, any U.S. LNG imported by Chinese buyers would still attract a hefty 25% tariff, which those importers would then have to absorb or pass on to customers. Consequently, this posed a stiff barrier for Chinese buyers to overcome before buying U.S. LNG.

China changed course in February – allowing for LNG tariff exemptions

Amid the coronavirus crisis, however, China announced it would enable buyers to apply for tariff exemptions on 696 types of goods – which on that occasion did include 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.

Petronet force majeure likely to add to general downward price pressure in Asia…

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. Last week’s move for force majeure by India’s energy major Petronet following a nationwide corona-related quarantine will only add to prevailing downward price pressure by freeing up cargoes, in our view. Notably, the 0.06mmt Angolan cargo aboard the Malanje – formerly Hazira LNG-bound – was snapped up by Kuwait Petroleum Corp. over the weekend, presumably at a very attractive price. The vessel has now been diverted to Mina al Ahmadi LNG following a 2-day wait outside Hazira’s OPL, our LNG Market Tracker indicates.

…though average Chinese prices still much higher than Asian spot in March

The question remains, however, to what extent Chinese buyers can benefit since much of their supply is locked into long-term contracts with Australian suppliers in particular. The latest price data published by China’s customs authority – featured in our LNG China – indicates the country’s landed LNG price averaged c. $8.85/mmBtu in March. In our view, U.S. LNG thus still stands a chance of being profitable if costs are managed carefully and LNG remains tariff exempt in China.

Profitability possibly as much a consideration as chance of re-opening door to China

Meanwhile, if the four vessels indeed end up arriving in China and are not diverted, the trades will have re-opened the door to a major market where U.S. LNG portfolios were forced by tariffs to cede vital market share. Short-term profitability may thus have been as much a consideration as the chance of gaining a foothold for the sellers’ respective U.S. LNG portfolios in China.