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What Trump’s China Tariffs Could Do to Your LNG Stocks

by | published September 18th, 2018

One of the nice things about investing in the energy sector is that you can make money regardless of the direction in which the sector actually moves.

This is something that can’t be said for many other industries, that’s for certain.

On the other hand, energy is highly influenced by worldwide events, which often increase both volatility and the perception of risk.

Especially if those events have a narrow political focus.

This latest influencer just cost me most of the weekend as members of my global network went into overdrive parsing a few things:

  • An expected White House decision,
  • The likely foreign reaction, and
  • Where opportunities would emerge as a result.

All of this came to a head late yesterday afternoon when our Commander-in-Chief escalated the ongoing tariff war.

And here’s what that means for the oil and gas sector…

You Get a Tariff, and You Get a Tariff

President Trump slapped an additional 10% on some $200 billion in Chinese imports to the U.S. The threat is now that these will increase to 25% by the year’s end, with an additional $267 billion targeting should Beijing retaliate.

The political hype surrounding the move has been exceedingly high.

Trump is attempting to show strength amidst his deteriorating domestic political picture, diverting attention from the off-year elections less than two months away. At the same time, this is a presidential move (again) playing to his declining political base, resorting to a protectionist-only view of international trade.

But discarding all that, the Administration in Washington is betting heavily on a strong U.S. economy bearing up against what is now certain to be international reprisals.

Several matters are clear.

For one thing, Trump discounts the adverse downstream impact to expanding tariffs.

That is, the only thing accomplished is to increase the price to users of imported products. Tariffs do not exclude product from market, they merely increase what users must pay for it.

U.S.-made replacements will not solve this problem, since the price is now guaranteed to rise. From the standpoint of the consumer, that was the market advantage of the imports to begin with.

For another, the net impact on domestic jobs is noticeably lacking in the rhetoric supporting the move. This was one of the main lessons from the first U.S. tariff moves against China. Those initially involved solar panels and accessories, followed soon after by steel and aluminum.

ALERT: This tiny $7 company could double, triple, or even quadruple fast, in the blink of an eye

The idea from the White House was to protect domestic production, and it still is. Unfortunately, the main driver of employment in the chain is found downstream from the production – either products imported from abroad or manufactured at home.

As seen most dramatically in the aftermath of the solar tariffs, that is increasing the overall cost of a product – which happened immediately in the case of the panels – resulted in a net loss of jobs even with the prospect that more of those components would be built in the U.S.

Preliminary industry estimates put the addition of manufacturing jobs at about 20% of the loss further down the line in installation and usage.

The steel and aluminum tariffs are now shaping up to add from 3% to 10% on the average cost of a new vehicle sold in the U.S. And that’s even before separate threats to add tariffs to European-built cars are figured into the mix.

And then there are the other sectors of the American economy targeted for reprisal tariffs by China.

Agriculture is the first that comes to mind – the only solution put forward by the White House is to compensate farmers out of public funds. Not exactly the option with a national deficit ballooning thanks to a tax cut last year.

Yet, as the U.S.-China tiff morphs into a genuine trade war, the main battleground is emerging as energy. Beijing has already targeted U.S. crude oil and process oil products in retaliation.

China does not import a large amount of crude from the states but does import a rising amount of a different refined product…

We’re About to Lose a Major LNG Client

The primary new area for Chinese response is liquefied natural gas (LNG).

China is poised to become the world’s largest importer of LNG next year, while the burgeoning U.S. export trade had regarded Chinese import of LNG as a main cog in a significant rise in American product globally.

That had been underway, that is, with 2018 U.S. LNG exports to China running well ahead of 2017 figures…

Until the tariff controversy brought it to a virtual standstill.

LNG exports are viewed as allowing American natural gas producers to have their cake and eat it too. As an increasingly profitable drain off of excess domestic production, LNG is regarded as allowing an expanding base of production without depressing the domestic price at the wellhead.

That is, until the tariff onslaught began.

Beijing initially put LNG on its 25% tariff list – essentially pricing U.S. exports out of its market in the face of non-tariffed volume from Qatar – with whom China has just signed a multi-decade agreement – Australia; Papua, New Guinea; and even Russia.

China later removed LNG from the list because of its critical need for energy. But the latest move by Trump will force it back on. Beijing has less leverage in choosing products to match U.S. moves in the trade war.   

All of which means gas producers in the U.S. may be the next to feel the downside of Trump’s tariffs.

Sincerely,


Kent

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  1. peter Hill
    September 19th, 2018 at 03:05 | #1

    An excellent commentary on the tariff fiasco and if we add in the facts that China has many more fiscal and monetary levers at it’s disposal, and holds a few trillion dollars worth of US treasury bones and US companies will be reporting before the mid terms and are unlikely to pull any punches, Trump is definitely on the back foot. So how do we putters prefit from this Kent?

  2. erich kellner
    September 20th, 2018 at 01:33 | #2

    It is my understanding that LNG deals by Chenier, for example, are usually long term contracts and tariffs shouldn’t invalidate them.

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