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Japanese companies vacillate over investing in U.S. LNG due to U.S.-China trade war

  • January 31, 2019
  • , NIKKEI Business Daily , p. 7
  • JMH Translation

By Yuta Sugiura

 

One after the other, Japanese companies are delaying their decisions on investing in LNG plant projects in the United States due to the U.S.-China trade war. A number of projects plan to manufacture LNG from inexpensive locally produced shale gas and then ship it to China, but now it is impossible to foresee whether such projects will be profitable. JGC Corporation and other Japanese majors in plant construction have tentatively agreed to accept some projects, and there is a chance that this will impact their corporate performance.

 

At an international conference held in Fukuoka in November 2018, Masakazu Toyoda, chairman of the Institute of Energy Economics, Japan, expressed his concern about the mid- to long-term impact of the U.S.-China trade war on the LNG market: “If the trade war drags on, U.S. LNG projects will be delayed and the supply and demand situation will be tight.”

 

Behind Mr. Toyoda’s statement is the fact that many LNG projects being planned in the U.S. hope to sell the gas in China. For development projects on the West Coast in particular, China, Japan, and other Asian markets are a short distance away. In September 2018, however, China countered the Trump administration’s punitive tariffs by placing a 10% retaliatory tariff on LNG.

 

In October, Gregory Vesey, CEO of Australia’s LNG Limited, announced it will delay its final decision on whether to build an LNG plant in Louisiana. The decision was to be made by the end of 2018, but the company is putting off the decision due to the trade war.

 

To combat air pollution, China is rushing to shift to natural gas, which has lower carbon dioxide emissions than coal. In 2017, China became the second-largest importer of LNG after Japan. China’s imports of U.S. LNG ballooned to six times that of the previous year.

 

JGC Corporation has tentatively agreed to participate in the Jordan Cove Project, an LNG plant project in Oregon on the U.S. West Coast. The project plans to market to China and other Asian countries. Although the contractors were selected in July 2017, the final investment decision has not been made yet.

 

At the U.S.-China summit in December 2018, the United States decided to delay the additional tariffs it had planned to impose from the start of 2019. Chinese President Xi Jinping indicated China’s intention to increase its purchases of agricultural products and energy from the United States but left the 10% tariff on LNG in place. If the two countries cannot reach a settlement during the 90-day postponement period, it looks like the tariff on LNG will be raised to 25%.

 

Moreover, with America’s imposition of retaliatory tariffs, China is increasing its imports of LNG from other gas-producing countries like Qatar. Some say that more and more companies will decide to invest in LNG plant projects located outside the United States.

 

There are also concerns that the procurement costs of steel and other materials imported from China will rise if the U.S.-China trade war is prolonged. In recent years, moreover, an increasing number of plant construction projects in areas with high labor costs, like the United States, choose to preassemble the plant modules in China. This means that Chinese tariffs will be encountered at every turn [in the case of U.S.-based projects]. It is inevitable that plant construction companies will review their procurement strategies.

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