Error message

Warning: include_once(): Unable to allocate memory for pool. in drupal_settings_initialize() (line 732 of /opt/drupal/includes/bootstrap.inc).

Rise In LNG Exports Could Bring Some Cheer

BMI View: Exports of liquefied natural gas (LNG) from Australia are set to rise from 2015 onwards as more terminals come online, and strong demand from Asian countries could see outbound shipments rise to as high as 15-20% of Australia's total export basket by 2017. Our core scenario is for the rise in LNG exports to help moderate the impact of declines in iron ore shipments beyond 2015, although higher upfront investment is likely to lift near-term import growth. That said, there remains significant risks, both to the upside and downside, given uncertainties within the domestic regulatory arena and the changing response of buyer nations.

Australia's growing gas export capabilities and accessible reserves have been mostly overshadowed by the country's mineral ore (iron and coal) export boom, but this is likely to change dramatically in the near future. Indeed, the surge in energy demand from North Asia, together with improving technology and vast infrastructure under construction, will likely push this industry into the limelight in the coming years. Compared to other key liquefied natural gas (LNG) export countries, the amount of liquification capacity (or LNG terminals) due to come online could propel Australia to the top of the exporter's league table, possibly supplying up to 25% of the world's gas trade by 2017 versus the current 8.6% (as of 2012). The International Energy Agency has even touted the possibilities for Australian gas exports to exceed that of Qatar in the near future, currently the world's main exporter of natural gas.

While LNG exports could have a significant positive impact on Australia's overall export performance, uncertainties are rife and the outlook of other key exports is dimming. Indeed, we expect iron ore shipments to decline over the coming years, as growth in demand for steel slows, weighed down by ongoing rebalancing within the Chinese economy. As such, we outline three possible scenarios below.

Gas Exports Could Potentially Take The Lead
Australia - Key Exports (LHS, US$bn) & Forecasted Timetable For Australian LNG Capacity To Come Online (RHS, bcm)

BMI View: Exports of liquefied natural gas (LNG) from Australia are set to rise from 2015 onwards as more terminals come online, and strong demand from Asian countries could see outbound shipments rise to as high as 15-20% of Australia's total export basket by 2017. Our core scenario is for the rise in LNG exports to help moderate the impact of declines in iron ore shipments beyond 2015, although higher upfront investment is likely to lift near-term import growth. That said, there remains significant risks, both to the upside and downside, given uncertainties within the domestic regulatory arena and the changing response of buyer nations.

Australia's growing gas export capabilities and accessible reserves have been mostly overshadowed by the country's mineral ore (iron and coal) export boom, but this is likely to change dramatically in the near future. Indeed, the surge in energy demand from North Asia, together with improving technology and vast infrastructure under construction, will likely push this industry into the limelight in the coming years. Compared to other key liquefied natural gas (LNG) export countries, the amount of liquification capacity (or LNG terminals) due to come online could propel Australia to the top of the exporter's league table, possibly supplying up to 25% of the world's gas trade by 2017 versus the current 8.6% (as of 2012). The International Energy Agency has even touted the possibilities for Australian gas exports to exceed that of Qatar in the near future, currently the world's main exporter of natural gas.

While LNG exports could have a significant positive impact on Australia's overall export performance, uncertainties are rife and the outlook of other key exports is dimming. Indeed, we expect iron ore shipments to decline over the coming years, as growth in demand for steel slows, weighed down by ongoing rebalancing within the Chinese economy. As such, we outline three possible scenarios below.

Gas Exports Could Potentially Take The Lead
Australia - Key Exports (LHS, US$bn) & Forecasted Timetable For Australian LNG Capacity To Come Online (RHS, bcm)

Core Scenario: LNG To Provide Moderate Boost To Exports And Trade Balance

Our base case assumes that only currently approved capacity and facilities under construction will come online by their stipulated deadlines. Under this scenario, we expect LNG exports to provide a slight boost to overall exports in the medium term (i.e. beyond 2015), offsetting the declines from iron ore demand. This suggests that gas exports could take the second spot and relegate coal exports to third place, as LNG shipments could account for almost 15-20% of exports by 2017. With overseas users in Japan, South Korea and China expected to form a stable base for gas demand due to their various power situations, we believe that gas could boost overall export growth to average 7.5% over 2015-2019 versus our previous estimates for growth to average 6.5% over the same period.

That said, we expect the construction of LNG trains to put upside pressure on import growth in the near term as firms import specialised equipment and machinery from abroad. As such, we have revised our near-term trade account forecasts for a larger deficit persisting until a sharper recovery takes place from 2017 onwards. This would also lead to a sharper improvement in the overall current account balance beyond 2017, in spite of a more gradual trajectory of deficit reductions over 2014-2016.

In The Running For Pole Position?
Operating And Planned LNG Export Capacities Of Selected Gas Exporting Countries, bcm

Bullish Scenario: Easing Regulation Within Australia While Capacity Elsewhere Could Be Delayed

We do see room for a more bullish scenario, given that Australia has significant conventional and unconventional gas reserves that have yet to be tapped. Although progress for unconventional gas projects is expected to be slow due to environmental uncertainties and dangers that surround the extraction process, known as hydraulic fracking or 'fracking', this could change given the eagerness of state governments to ensure sufficient gas supply for local businesses. Furthermore, the keenness of the Abbott administration to reduce 'green tape' or regulatory burden to boost mining investment could also aid an acceleration of coal seam gas exploration projects in the eastern states of Australian (New South Wales and Queensland). Should more projects online, this could encourage greater investment in terminals which, in turn, would boost the country's capacity to export.

On top of easing regulatory burden in Australia, should US LNG terminals fail to come online as fast as projected (given that a significant proportion of projects are pending approvals from the Department of Energy and the Federal Energy Regulatory Commission), prices for Australia's gas could head higher. Under such a scenario, the value of Australia's gas exports may even exceed that of iron ore, which would lead to in an even faster widening of the trade surplus, which would bode well for the country's current account dynamics.

How Long Will Demand Persist?
Gas Production, Consumption And Overall Surplus/Deficit For Selected Asia Pacific Countries, bcm

Bearish Scenario: Waning Anti-Nuclear Sentiment And Domestic Reservation Policy

That said, beyond the risks associated with such large projects such as delays (due to overly bullish construction forecasts), cost overruns and technical difficulties, demand risks still lurk as the current boom in gas demand from countries such as Japan and South Korea may not persist indefinitely. Indeed, waning of anti-nuclear sentiment in these countries would dramatically alter the demand outlook for gas, and ultimately, export receipts for Australia. Moreover, the keenness of these countries to secure alternative, cheaper supplies from other countries such as US, Canada and even Russia, could result in demand being diverted and dim the outlook for Australia's gas exports. Indeed, high prices and limited sources have spurred Japan's Ministry of Economy Trade and Industry to push for the creation of a regional spot price benchmark to increase price transparency, which could spell downward pressures for Asian gas prices (see 'Physical Market Threatens Benchmark Challenge To LNG Pricing', published on September 25, and 'LNG Exporters Fight Back In Pricing War' on October 29 for more details on this issue).

Domestically, growing fears of a gas shortage (mainly in the eastern states of Australia) and the adverse impact of higher prices on the manufacturing sector could pressure the federal government to look into instituting a gas reservation policy similar to the one implemented in Western Australia (where the state government seeks to secure around 15% of gas available from new offshore developments for use in the state). Such a policy is likely to dampen export potential and weigh on the profit outlook for these LNG exporters, possibly to the extent of dissuading the construction of proposed capacity. Construction of a transnational pipeline could also weigh on exports as more gas is channelled towards domestic needs.

LNG Ramp-Up Could Spell Appreciatory Risks
Exchange Rate - US$/AUD

LNG Story Could Raise Appreciatory Pressures On The AUD

Despite the bright spot for exports on the back of rising LNG shipments, we believe that the rebalancing process within the broader Australian economy will continue to impose fundamental depreciatory pressures on the Australian dollar. Hence, we see the currency drifting downwards and settling at US$0.75/AUD over the longer term. That said, we highlight that the re-emergence of a positive commodities story in Australia could once again entice investors to hold more of the country's financial assets, which could result in bouts of short-term appreciatory strength and, potentially, lead to a milder depreciation in the unit.

Read the full article

This article is tagged to:
Sector: Country Risk
Geography: Australia
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.