Anticipation that the United States and China are warming up to a trade deal helped boost sentiments across markets. Beijing has reportedly pledged to reduce retaliatory tariffs and other barriers on American products, while Washington is set to reciprocate with the rollback of most, if not all, tariffs imposed on at least $200 billion worth of Chinese goods since last year.
The expected improvement of the Sino-U.S. relationship should also act as a major tailwind for the global liquefied natural gas (or LNG) market as China is the second biggest importer of LNG behind Japan.
In particular, shares of Cheniere Energy, Inc. LNG gained around 1.6% on Monday on reports that the U.S.’s only listed LNG export pure play will supply about $18 billion of natural gas chilled to liquid form as part of a long-term contract with China’s state-owned Sinopec SNP.
Let’s look at the potential implications for LNG exports in light of the reports that the two world’s largest economies are on the verge of forging a deal to end their bitter year-long trade dispute. We also examine how this de-escalation of the tariff war will impact Cheniere Energy and its future growth.
Strong LNG Demand Growth in China
Per the Anglo-Dutch energy giant Royal Dutch Shell plc’s RDS.A 2019 LNG Outlook, LNG demand reached 319 million tons last year – up by 27 million tons from 2017 and significantly higher than the 100 million traded in the year 2000. The 300+ million tons of LNG trade in 2018 was enough to power about 643 million homes.
Global LNG demand is likely to continue growing for the next few years and is projected to rise to around 384 million tons per annum by 2020. Supplies from Chevron-led CVX Gorgon and Wheatstone mega-projects in Australia are already being absorbed by the strong demand.
While the increasing demand for gas in the European power sector will be a key factor in the near-term LNG supply rise, the consumption boost is primarily set to come from Asian importers like China, India, South Korea and Pakistan as part of efforts to switch from coal and heating oil for environmental reasons.
Japan remains the world's largest buyer of LNG but China leapfrogged South Korea to take the second place in 2017. As the nation transitions from coal to natural gas, China’s imports of LNG rose 40% in 2018 to 16 million tons.
Investors should also note that China's crackdown on pollution has created a long-term positive trend for LNG demand growth with the country required to buy roughly 40% of its overall consumption in the face of domestic production shortage. Meanwhile, the comeback of nuclear power in Japan is cutting into the demand for gas-fired power generation and, by extension, LNG demand.
Cheniere: The First Company to Export LNG from the United States
With domestic natural gas prices remaining constrained on the back of abundant supplies, the producers sees a big opportunity in selling U.S. production of the commodity at higher prices overseas.
While there are a number of North American LNG export projects lined up for Federal Energy Regulatory Commission (FERC) nod, Cheniere Energy’s terminals in Louisiana and Texas, and Dominion Energy Inc.’s D Cove Point export plant in Maryland – which shipped its first cargo in 2018 – are the only ones operating currently.
Being the first company to receive FERC approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal in Cameron Parish, Louisiana, Cheniere Energy certainly enjoys a distinct competitive advantage.
It’s true that Cheniere Energy is not entirely dependent on a single country, with the company boasting of a diversified customer base having shipped LNG cargoes to 32 different nations and regions worldwide. Still, it must be admitted that China is a leader in global LNG import growth and the country is a major area of thrust for Zacks Rank #3 (Hold) Cheniere Energy, which already has two long-term supply agreements signed in the country.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
With China targeting hundreds of billions worth of goods from United States for import levies as part of its tit-for-tat tariff measure, there is a risk that U.S. LNG exports would become uncompetitive. The Chinese buyers are also on the lookout for purchasing natural gas from non-U.S. LNG suppliers, which might affect the likes of Cheniere Energy's revenues, since it enjoys a dominant position in the U.S. LNG export market. Therefore, a potential U.S.-China trade pact could be a big boost for the American LNG exporters and certainly bode well for the future.
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