Gas exports should help ward off recession
AUSTRALIA’S much-anticipated ramp up in LNG exports is still over the horizon, but the culmination of a $220 billion investment that will see production increase from 20 million tonnes per annum in 2009 to 85MMtpa in 2018, will lift the national economy.
HSBC chief economist – Australia & New Zealand Paul Bloxham said that with the LNG forward sold on long-term contracts to Asia, the ramp up to becoming the world’s largest LNG exporter is pretty much ‘baked in’, and should add contribute a hefty average of around 0.6 percentage points to GDP growth in each of 2015-16, 2016-17 and 2017-18 .
“It is hard to get the overall economy to look too weak with that sort of positive contribution,” he said.
“This is an important story that puts Australia in a different position to many other nations when it comes to trade.
“Although global trade remains weak, the ramp up in LNG production will almost certainly see Australia’s export volumes grow strongly over the next 2-3 years. This is in addition to the pick-up in exports of tourism and education services that is currently being supported by the lower Australian dollar.”
Only one of the LNG projects is now complete and moving into production, but all of the projects are expected to move into the production phase over the next few years as the developments grind on, delays and all.
But they will deliver into a market that is not as good as anticipated when the projects were sanctioned.
Bloxham said if the Asian economy weakens more than expected it won’t affect volumes, but will push down gas prices, although it is the sheer scale of volumes that will drive GDP growth.
State royalties are volume based.
“Although there is considerable uncertainty about the pricing formulas that have been used in the forward-contracts, most of them have been benchmarked to the oil price,” he said.
“The sharp fall in oil prices since mid-2014 is therefore likely to limit the short-term profitability of many of the projects. Reduced profitability of the projects would weigh on corporate and state tax revenues. That is, GDP growth would still be supported, but local income growth could be weaker.”
He said the capital invested in these intensive projects with huge fixed costs means reducing gas production is not the answer, and only weighs even more heavily on profitability, however the projects are built with 30-50 year time scales, so at some point, the plants will be profitable
“From Australia’s perspective it is also worth noting that these projects are almost entirely owned and run by global multi-nationals. Although Australia’s economy may therefore not have benefited from all of the upside from these projects, it should also only be expected to suffer from part of any downside,” he said.
Bloxham also talked down a risk of an Australian recession with the end of the resources boom because of the current upswing in the housing and services sectors, supported by low interest rates and recent falls in the Australian dollar.
“The expected ramp up in LNG exports is another important element in the story that should not be forgotten,” he said.
Regionally, there is still come expectation that Asian demand for new LNG will double over the next five years, unfortunately, that market is being targeted by Australia, US, Canada and Mozambique.