Bluescope warns on gas “catastrophe”

Advertisement

From the AFR:

BlueScope Steel chief executive Paul O’Malley says the energy costs of his booming North Star steel operations in the United States are five to 10 times lower than the firm pays in Australia as he warned of a potential energy catastrophe right across Australian industry.

US president Donald Trump was intent on making US industry even more competitive through a range of policies, and Mr O’Malley said the contrast between the USA and Australia couldn’t be more stark when it comes to the future direction of electricity costs over the next few years.

“They have low and reducing energy costs,” Mr O’Malley told reporters on Monday, referring to the situation in the US. He was speaking after BlueScope delivered an impressive 79 per cent rise in bottomline net profit after tax to $359.1 million for the first half of 2016-17.

Mr O’Malley said he was frustrated at the inability of the Australian industry to contract for gas, when much of the country’s gas was now being “hoovered up and shipped overseas”.

“The biggest issue is the ability to contract for gas. Gas is very tightly held in this country,” he said, adding that with baseload coal-fired operations being withdrawn from the market, they needed to be replaced by gas.

“If we do not have coal, then we must have gas,” he said. But he pointed out that gas reservation policies were anathema in Australia. “Reservation in Australia is a dirty word”.

It won’t be before long. There is no other answer. For gas users there is no other choice. For big power consumers, the government’s plan for clean coal will only embed higher prices because it so expensive. Prices fell back in the past couple of days to an east coast average of $10.33 but that’s still 60 cents/GJ high than the same gas in Japan:

srtj

And the trends are clear.

The US has cheap gas for a number of reasons. Costs are better contained. The tight oil revolution has flooded the market with it (given it is in part a free bi-product of fraccing). It has more extensive pipelines and it has domestic gas reservation:

tvc_46dac8e5e8800398ff077c93ec2c5606

Over the past few years, the US Department of Energy has approved 11 LNG exports plants, seven of which are under construction, for a total output of roughly 70mt. But it did extensive economic modelling first and determined that exports would not overly inflate prices. You can still buy options on US natural gas out to 2027 at around $3.50GJ.

In Australia nobody modeled anything. There was a simply mad dash to throw the gas offshore. It was a bubble that has burst. And now the cartel is gouging the locals to offset its export losses.

We need gas reservation. The eastern gas market is now in a state of outright failure as the gas cartel applies discriminatory pricing willy nilly to Australian consumers and business.

The Curtis Island LNG plants need to be part nationalised or to be taxed heavily to recycle the dough into subsidies for local power, a kind of Piguvian reservation strategy.

Otherwise the problem will resolve itself over time via demand destruction as industry collapses and another wrenching bout of Dutch disease pushes the economy precisely the wrong way in its post-mining boom adjustment.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.