Bloxo: LNG will save us!

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Bloxo tackles the forthcoming LNG volumes boom today:

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After many years of talking about the impending rise in liquefied natural gas (LNG) exports, 2015 is set to be the year when it all begins. Seven major projects are being built across the country with the earliest (and largest) having commenced construction in 2009 and it is only now that these projects are set to start exporting.

New LNG capacity was a key driver of the resources sector investment boom and LNG is now set to be a major driver of export growth over coming years. Given the capacity that has been built, LNG export volumes are forecast to rise 70% for the next financial year and to average growth of around 42% a year over the next three years. We expect this to contribute around 0.7ppt to GDP growth in each of the next three years and an average of almost 3ppt to export growth a year, which is a strong underpinning for GDP growth.

We continue to expect that the effect of the ramp-up in exports in coming years will more than offset the decline in investment as projects are completed, leaving the resources sector a positive contributor to overall GDP growth. Although the LNG plants are largely foreign-owned, so profits from the plants will go abroad, the economy will be supported by growth in tax revenues, as LNG exporters pay both corporate tax and state royalties.

Although the recent fall in oil prices has introduced some uncertainty about the value of LNG exports that will stem from the ramp-up in production, there is little doubt that LNG export volumes will ramp up in line with new capacity expansions, supporting GDP. A challenge presented to the local economy may be that the ramp-up in LNG exports draws on local gas supplies, which could put upward pressure on local gas prices, particularly in New South Wales.

LNG is set to overtake coal as Australia’s second largest export by 2018. Australia is also likely to become the world’s largest exporter of LNG at that time, overtaking Qatar. LNG exports are forward-sold on contracts to China, Japan, Korea, Taiwan and India.

Sigh. The volumes are very unlikely to offset the investment decline but let that be. The more important point is that the nature of the growth contribution is totally different. Net exports are an accounting entry providing very few jobs whereas investment and construction is very labour intensive, so the net result is far higher unemployment in the sector despite the book entry of growth.

Add in the fact the contract prices which underpin roughly 80% of the output will remain under pressure for several years owing to the oil glut and after that the contracts themselves are likely to fray as competition grows, and LNG will also be weighing on the terms of trade and income for several years as contract prices fall from $14 now to $12 by 2018 and probably sooner.

This is the problem with Australia’s houses and holes economy. If the export revenue (which creates very few jobs) isn’t leveraged up and spent by the government on welfare or the private sector on houses (or both!) then there is no local activity. Conversely, if you do leverage it up you blow the current account and are constantly as risk of an external shock.

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Don’t get me wrong, LNG is an awesome rising sector and in the long term as US shale depletes, and I expect it will be an excellent earner for Australia. But the benefits must be viewed realistically and it should never have been allowed to hollow out broader tradable sectors.

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.