The problem for energy markets isn’t whether China can actually buy the amount of crude oil, coal and liquefied natural gas (LNG) it has apparently committed to under the trade truce with the United States.
The real issue is what happens if Beijing tries and succeeds?
The terms of the deal imply an absolutely massive increase in Chinese imports of US energy, and if this actually comes to pass, it will have serious disruptive effects across global markets.
US President Donald Trump and Chinese Vice Premier Liu He signed a deal in Washington on Wednesday that cut some US tariffs on Chinese goods in exchange for Beijing agreeing to substantial increases in purchases of energy and agricultural commodities, as well as manufactured goods and services.
As part of the agreement, China agreed to buy at least $52.4 billion in additional energy purchases over the next two years, from a baseline of $9.1 billion in 2017. That will be broken into $18.5 billion in 2020 and $33.9 billion in 2021.
For this year the deal implies that China will have to buy about $27.6 billion in energy products from the United States.
It’s worthwhile to look at a little history to put this figure in context.
For crude oil, the best-ever month for China’s imports from the United States was June 2018, when 14 million barrels arrived, according to Refinitiv data.
If that record performance is annualised, it would mean that China would buy about 170 million barrels, which would be worth about $9.82 billion at the current price for West Texas Intermediate futures of $57.81 a barrel.
For LNG, the record month for China’s US imports was January 2018, when 452,000 tonnes of the super-chilled fuel arrived.
If this top performance is annualised it would mean imports of around 5.42 million tonnes of LNG, which at the current North Asian spot price of $5.30 per million British thermal units (mmBtu) equates to a value of about $1.54 billion.
For coal, the record month of Chinese imports was February 2017, when imports from the United States were 957,000 tonnes.
Annualising this figure results in a value of $1.77 billion, and that’s assuming all of the US exports to China are higher value coking coal, which hasn’t been the case as there have been small volumes of cheaper thermal coal in the mix.
Under this hypothetical scenario, the combined value of the highest-volume years for these three energy products comes out to $13.13 billion.
This means that for China to reach the 2020 target of $27.6 billion in energy imports from the United States, it would take more than a doubling of the record months achieved in the past.
While this seems unlikely, what would be the consequences if China actually did try to buy this much crude oil, LNG and coal from the United States.
If China doubled its record month of 466,000 barrels per day (bpd) of US crude imports to around 1 million bpd, it would then account for about a third of all US crude exports.
This is an obvious risk for US producers, who may be reluctant to become overly reliant on one major customer.
It also likely means that Chinese refiners will be bidding hard for US cargoes, which may boost the price of US crude against other global benchmarks, eroding its competitiveness in other markets.
It also remains to be seen how China’s existing suppliers would react to losing market share in the world’s top crude importer: Would they simply roll over, or, more likely, try to protect their market share while going after US customers outside of China?
In LNG, it’s possible that the United States could supply substantially more to China, given the ramp up of export terminals in the coming two years.
But again, how will top exporters such as Qatar and Australia react?
Qatar can go after US markets in Europe, but Australia’s geographic position means it will be forced to compete hard in Asia.
In coking coal, if China doubled the most it has ever bought from the United States in a month, it would imply annual imports of around 20 million tonnes, worth about $3 billion, and equivalent to around 40% of US total coking coal shipments.
Again, this may be possible, but would result in a disruption of flows as other Asian coking coal importers such as Japan, South Korea and India would have to switch suppliers and re-negotiate deals.
Overall, there are two things that become clear from the so-called Phase 1 trade deal, firstly the target for energy imports is probably unrealistically high, and secondly, if China does try to meet the target it will prove disruptive for markets.
Source: Business Standard