Australia’s LNG, coal exports under threat from China

Beijing has an unofficial ban on Australian coal while LNG has also started to be targeted by smaller Chinese buyers

Escalating trade tensions will see China‘s ban on Australian coal extend into 2022 while Beijing may pull back on mergers and acquisitions and signing new long-term LNG contracts, consultancy WoodMackenzie said.

Beijing has an unofficial ban on Australian coal while LNG is also being targeted by smaller Chinese buyers, a further setback from a trade spat that has also seen wine, barley, beef, wheat, lobsters and cotton all targeted over the past year.

WoodMackenzie sees no let-up for a coal stand-off that has seen $1bn of supplies stranded off the Chinese coast for months on end, with the bulk vessels the latest conscripts in China’s sweeping campaign of trade warfare against Australia. The National Development and Reform Commission suspended economic talks with Australia earlier in May.

“An informal ban on thermal coal has been in place since 2020 and has affected trade flows and seaborne prices over the past six months. Second-guessing how long such bans might continue is risky, given that NDRC referred to an ‘indefinite suspension’ of dialogue, but we assume the impact on thermal coal will continue at least 2022,” said WoodMackenzie’s Asia Pacific vice-chairman Gavin Thompson.

The emergence of LNG as a target for China will put some of Australia’s biggest producers on edge. China is the joint largest export market for Australian LNG, supplying 45 per cent of China’s needs, so may be reluctant to make any immediate moves that would imperil its biggest supply source.

Still, it could look to pull back from agreeing new long-term deals with Australian suppliers in response to the diplomatic barbs.

“Beijing might consider moves to deter Chinese buyers from signing new long-term contracts with Australian projects. This could be politically expedient, allowing Beijing to highlight its willingness to widen punitive actions on Australian exports, while having a minimal impact on China’s future LNG supply options given the relatively limited volume of Australian pre-final investment decision supply,” Mr Thompson said.

Woodside Petroleum in February said it had been forced to postpone talks to sell LNG to China, the world’s biggest gas buyer, blaming an economic rift between Canberra and Beijing, which forced Australia’s largest LNG producer to find alternative markets.

That move ratcheted up the economic fallout between the nations after potential Chinese buyers pulled out of a deal in November to acquire a stake in the energy producer’s $16bn Scarborough gas project.

While existing long-term contracts for LNG might be off limits, sales on the spot market may be another lever China can pull should it wish to further flex its muscle.

“Unconfirmed media reports this week have suggested that smaller LNG buyers in China have been told that Australian spot LNG cargoes are now off-limits. If true, then while the impact will be relatively limited — China’s second-tier LNG importers only account for around 10 per cent of the country’s total imports — it would signify a further escalation in China’s use of trade in what is an essentially political dispute,” Mr Thompson said.

M&A could also be derailed.

“Without a tangible improvement in relations, for example, it looks very unlikely a Chinese company could acquire a significant LNG or upstream asset in Australia, either directly or through investment in a domestic company. For sellers in Australia’s active upstream and LNG M&A market, this won’t come as welcome news,” WoodMackenzie said.

Still, the bulk of Australia’s LNG exports to Chinese giants including CNOOC, Sinopec and PetroChina are unlikely to be caught up in the diplomatic sniping, according to consultancy EnergyQuest.

“All three Chinese companies have significant long-term contracts and equity investments in Australian LNG projects so that any attempt to limit Australian cargoes would require breaking contracts and harm the equity interests of the Chinese state-owned companies,” EnergyQuest chief executive Graeme Bethune said.

Australia’s LNG exports to China have been growing with April’s 43 cargoes just short of an all-time record although both nations may be better served by ultimately expanding their customer base.

“Tensions with Australia and perceived higher sovereign risk are likely to be encouraging Chinese LNG buyers to look elsewhere. Major Chinese companies are reported to be in talks with Qatar about possible equity participation in the proposed Qatar expansion. Even without the current political tensions it would make sense for China, as well as Australia, to diversify their LNG trade,” Mr Bethune said.

A bigger medium-term problem for Australia’s LNG industry is not having enough gas to keep production trains full, EnergyQuest said.

The Woodside Petroleum-operated North West Shelf plant has reportedly asked Japanese utilities to defer some LNG cargoes due to water ingress into one of the producing wells.

“Only eight cargoes are expected to be affected but this is a reminder of the maturity of the NWS, which is soon to move into late-life production decline. The NWS is Australia’s second-largest LNG project. Maintaining production depends on onshore gas plus development of additional gas fields, initially Scarborough, perhaps followed by Browse,” EnergyQuest said.

The Santos-led GLNG project in Queensland is still producing well short of its capacity due to limited gas supply while Shell’s QCLNG project will be reliant on developing Arrow Energy’s field, half owned by PetroChina.