Shell and Glencore Could Be Winners From Chinese Tariffs

By Anonymous

China and the U.S. may not yet be in an all-out trade war, but the trenches are getting wide and deep. The more obvious risks shouldn’t blind investors to the opportunities.

On Monday, President Trump announced new tariffs on $200 billion of Chinese imports. Late Tuesday, China fired back to the tune of $60 billion. But China needs many of the things the U.S. is selling. It could now turn elsewhere to buy them.

Shell and Glencore Could Be Winners From Chinese Tariffs

A liquefied natural gas ship at China’s Rudong LNG Terminal. A growing trade fight with the U.S. could benefit Asian and European companies, particularly in the energy arena. Photo: china daily/Reuters

Two obvious needs stand out: liquefied natural gas (LNG) and coal. U.S. coal was hit with an initial round of Chinese tariffs this summer, and LNG is under the gun this time around. Non-U.S. energy heavyweights with a big Asian presence, such as Royal Dutch Shell and Glencore , GLNCY 3.47% could benefit.

China’s LNG imports surged 60% last fall and winter as local officials shut down coal power plants in line with environmental targets--a top priority of President Xi Jinping. Asian spot prices doubled in late 2017, handing a windfall to gas marketers like U.S. LNG exporter Cheniere and Shell. Shares in Cheniere rose 3% Tuesday following news that Chinese tariffs on U.S. LNG would be 10%, rather than the 25% originally mooted.

That bounce may be premature. China may not be able to avoid paying up for U.S. LNG this winter, but tariffs could cause problems for exporters’ expansion plans. Asian spot prices are currently about $12 per million British thermal units. Cheniere in 2017 estimated its break-even point for shipments to Asia from future projects at $7.5 to $8.5 per mmbtu. A 10% tariff will therefore erase about a quarter of Cheniere’s margin of safety on the investments; if the tariff rises to 25%, about three quarters of that margin goes.

Following another round of tariffs between China and the U.S., the business community is pushing back. The WSJ’s Gerald F. Seib explains. Photo: AP

If China does to a great extent avoid U.S. LNG spot purchases this winter, it will probably need more coal to compensate. China has plenty of low-quality coal at home, but needs to blend that with cleaner, more calorific coal from abroad to hit pollution targets. Chinese inventory build is likely one reason for the unusually large price premium for high-quality coal in Asia right now: Chinese imports were 25% higher in the three months to end-August compared to the prior-year period. Firms like Glencore, sitting on a mountain of high-quality Australian coal, including from its recent Hunter Valley purchases, will be well-positioned if an LNG shortfall this winter leaves the Chinese and other Asian buyers fighting over high-calorie Asian coal.

The U.S. and China seem to be in for an extended, bruising fight. Asian and European companies, particularly in the energy arena, could be among the beneficiaries.

Write to Nathaniel Taplin at [email protected]