U.S. tightens exports to China’s chipmaker SMIC, citing risk of military use
DA NANG – The Donald Trump administration is ramping up retaliatory rhetoric against China over its handling of the coronavirus crisis and its corresponding devastation, a renewed trade war threat that promises to hit US energy producers if and when China retorts in kind.
Keith Krach, undersecretary for economic growth, energy and the environment at the US State Department, said on Monday (May 4) that “we are now turbo-charging” a drive to decouple US supply chains from China.
Krach said that was key to US national security and that the government would soon announce a new course of action after agencies probe which manufacturing should be deemed “essential” and determine how to produce those goods outside of China.
Last month, Trump said he was considering new tariffs on Chinese goods on top of an existing 25% levy punitively imposed on some US$370 billion worth of Chinese goods. If implemented as threatened, it will be bad news for America’s already beleaguered oil and gas producers.
US producers have already been hurt by the trade war. US crude oil exports to China, the world’s largest importer, were zilch in the first quarter of this year due to trade tensions. That’s eroded hard-fought market share US producers had previously steered away from entrenched Chinese suppliers, including oil kingpins Saudi Arabia, Russia and others.
US liquefied natural gas (LNG) imports to China were also hit last year by a punitive 25% levy, throwing several US LNG project proposals into doubt due to the likely lack of long-term Chinese off-take deals. Those proposals have also been stymied by the likely lack of Chinese investment needed to reach final investment decisions (FID).
Late last year, Beijing offered a trade war olive branch in the form of renewed energy purchases. As part of the so-called “phase one” trade deal, Beijing agreed to ramp up US oil and gas imports by at least US$52.4 billion over the next two years, a deal which kicked in on January 15.
In April, China procured its first US LNG cargo since March 2019, and has signaled that as many as four more are on the way. Now, with Trump’s ramped up trade war rhetoric and anti-China messaging in his re-election campaign, those promised new LNG imports will be in jeopardy if the US leader pushes through with his new threats.
China has not indicated how it would respond to a renewed trade war push, but last year’s tit-for-tat gives some indication on the energy front. In March 2019, as trade tensions spiked, Beijing hit US LNG imports with a 10% levy, then upped that duty to a prohibitive 25%.
The tariffs strategically hit the US energy industry’s underbelly, namely its LNG sector, which is increasingly trying to compete with top producers like Australia, Qatar and others for global market share.
It’s apparently a risk Trump is willing to take in the name of decoupling. As the US shifts its supply chains and manufacturing out of China to new Asian economic partners, energy flows will divert with the shift. Both crude oil and natural gas will be sent to new Asian demand centers where manufacturing activity is expected to gain new momentum.
Whether that will be enough to keep US producers now struggling to survive amid a historic oil price collapse and Covid-19’s destruction of demand is not immediately clear.
For now, Japan, India and other Asian nations can offset the potential loss of US energy exports to China. Going forward over the mid-term, however, it will become more problematic due to China’s vast energy consumption when its economic engines are firing.
China is already the world’s largest crude and second biggest LNG importer, trailing only Japan. China will become increasingly dependent on foreign imports for both fuels to make up for flattening Chinese oil and gas production.
If the US cedes market share, particularly to other LNG producers than can sign cost competitive long term off-take deals with China, it will put US ambitions to rival Qatar and Australia for the top global LNG exporting slot in jeopardy.
Due to an ongoing supply overhang in LNG markets that will likely persist into mid-decade, China has plenty of other LNG procurement options, including Australia, Malaysia, Indonesia, Qatar and others.
US oil and gas companies are already beating a path to Vietnam, a trade war winner as factories relocate to the country. They are pressing Hanoi not only to sign LNG offtake deals, but also to invest in new gas-to-power projects in the country’s Mekong Delta area, where a gas supply crunch is being felt.
Vietnam’s gas supply shortage is largely attributed to Chinese pressure to cease exploration of new hydrocarbon resources in Vietnam’s own UN-mandated 200-nautical mile exclusive economic zone (EEZ) in the South China Sea.
As China’s threats against Vietnam in its own waters continue, it will force a pivot to more US energy imports and the necessity of Washington to protect those energy exports through the volatile sea, which is claimed in large part by Beijing.
Similar energy flow shifts could happen if more manufacturing is moved out of China into Japan, South Korea and India. All three US geostrategic allies are already importing rising amounts of US-sourced LNG and crude oil.
South Korea has signed its first long-term energy contract with the Trump administration, committing itself to an additional $9.6 billion worth of purchases of LNG from 2025 to 2039.
The country is also pivoting to using more gas for its power sector to replace its current reliance on thermal coal-powered plants, as well as a diversification away from nuclear power.
India, for its part, has already ramped up US LNG purchases to fill storage tanks amid a price plunge for the supercooled fuel which recently dipped below $2/MMBtu, marking an all-time low.
Indian LNG imports spiked a massive 20% year on year in March despite a countrywide lockdown. India’s largest gas importer, Petronet LNG, said it would invest over a five-year period in Tellurian’s proposed $27.5 billion Driftwood LNG export project in the US state of Louisiana during Trump’s visit to the country earlier this year.
Japan has also pledged to increase US energy purchases amid pressure from Trump over its trade surplus with the US.