Souring US/China relations could have big impacts on energy, agriculture trade

 In In the News

Washington —
The US move to no longer recognize Hong Kong’s independence from mainland China could lead to new tariffs and a potential collapse of the Phase 1 trade deal that promised $50 billion in US energy purchases through 2021.

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While relations were already fraying between the two world powers as a result of the coronavirus outbreak, China’s vote this week to end Hong Kong’s autonomy may serve as a key turning point in US/China relations. In response to China’s action, Secretary of State Mike Pompeo said Wednesday that Hong Kong no longer warrants special trading status with the US.

Implications for energy, metals and agriculture trading, as well as the broader global economy, could be significant, analysts said.

“The global economy will be trying to reboot in the coming weeks, but the potential second wave of US-China trade tensions could be a big weight on the recovery for the macro economy and energy markets,” said Joe McMonigle, analyst for Hedgeye Risk Management.

McMonigle said oil demand could return to pre-lockdown levels by early next year, but annual growth in demand for crude, refined products, LNG, power and renewables would take a hit under renewed China tensions.


ClearView Energy Partners said Thursday that China Customs data for April underscores that Beijing is not on track to meet its purchasing obligations under the Phase 1 trade deal struck with Washington in January. It added that the deal “could collapse in the face of broader Sino-American tensions.”

The Trump administration could soon impose the same tariffs on Hong Kong that it levies on goods and services from mainland China, wrote Kevin Book, ClearView’s managing director. In addition, the US Congress might take its own action to impose new sanctions on China.

Rising tension and Chinese reprisals from Washington’s response could have broad economic consequences.

“Frictions from escalating economic conflict between the United States and China have potential to dampen energy demand upside associated with the reopening of economies around the world,” Book wrote.

A top State Department official said during a briefing Wednesday that the Trump administration is considering options beyond revoking Hong Kong’s special economic and trade benefits.

“I’m not going to forecast or limit what it could be, but there’s a very long list of things that the president could do in response,” said David Stilwell, assistant secretary for the Bureau of East Asian and Pacific Affairs.

US crude exports to China have not picked up despite the Phase 1 deal. Only 17,000 b/d flowed to China in December, and no exports were recorded in January or February, according to the latest Energy Information Administration data. US crude exports to China peaked in March 2018 at 469,000 b/d.


A collapse of the initial trade agreement would be a significant blow to US LNG exporters, after deliveries to China resumed April 20 following a 13-month halt due to the impact of tariffs.

While duties of 25% remain on the books, Beijing granted exemptions to some of its companies, allowing them to import US LNG under more economic circumstances.

The BP-chartered Maran Gas Vergina’s arrival from Freeport LNG in Texas was seen as a positive step toward more robust LNG trade flows between the US and China. A handful of other tankers that loaded on the US Gulf Coast were headed to Chinese ports at the time, according to Platts cFlow.

Even with the trade deal intact, how much volume China can absorb is uncertain, as Northeast Asian spot LNG prices remain low and the potential for a second global wave of the coronavirus looms. In a sign of the dampened overall market sentiment, some 45 LNG cargoes scheduled to be loaded in July at US export terminals have been canceled by offtakers, according to market sources.

More broadly, normalizing LNG trade relations with China is critical to efforts by US developers of new liquefaction terminals to secure financing for their projects. As China’s appetite for LNG grows, it has been hoped to become a bigger buyer of US supplies. Cheniere Energy is currently the only US LNG exporter with a firm long-term LNG supply contract with a Chinese counterparty.

Amid the tensions, the strain on demand from the virus and low international prices, multiple US developers have delayed final investment decisions on LNG projects until 2021, or stopped providing timeline updates altogether.

In the fall of 2018, China imposed tariffs of 10% on imports of US LNG in retaliation for duties the US placed on imports of Chinese goods. The tit-for-tat tariffs were raised to 25% by Beijing in June 2019.

In January, China agreed as part of the Phase 1 deal to buy an additional $18.5 billion in US energy goods in 2020 and $33.9 billion in 2021, compared with 2017 levels. The deal called for LNG, crude oil, refined products and coal purchases, but did not set volumes.


The rising tensions pushed US soybean FOB Gulf offers lower Thursday, according to market participants. FOB USGC offers for July cargo shipment, and CIF New Orleans for June barges shipment premiums to the CBOT July (N) futures contract both fell 3 cents/bu.

Chinese state companies appear to be avoiding US soybean purchases, even though the supplies are becoming more competitive and are more logistically reliable than Brazilian soybeans bound for Asian markets. US sources said they have seen some activity from Chinese crushers, but state-owned companies have focused buying from Brazil.

Market sources in Brazil expect port premiums to remain supported due to the growing tensions.

S&P Global Platts assessed on Wednesday Santos port premium over CBOT futures (spot loading) at the highest value since early November 2019, as Brazil enters its intercrop period and as premiums act to balance a stronger currency and the firm demand from China.

In US ethanol markets, producers have all but given up on China returning to purchasing ethanol. Despite the Phase 1 deal that was expected to include purchases of US ethanol, most sources have told Platts that the country can’t be counted on to help pull the industry out of a slump.

As late as 2016, China was the third-biggest importer of US ethanol, buying 749.96 million liters of ethanol that year. Shortly after, the country imposed substantial tariffs on US ethanol imports. By 2019, Chinese imports of US ethanol had fallen to 260,588 liters.