Prepare for the LNG boom

Spiralling global demand has Australia facing a boom in its gas market similar to the ones seen in other commodities in past years, according to ANZ's head of commodity research, which could see LNG overtake iron ore as the main driver of Australia's exports in the export stakes and help push Australia's trade balance back toward the black.

"China is net short gas and very long coal at the moment."
Mark Pervan, Head of Commodity Research, ANZ

Prepare for the LNG boom

Mark Pervan says LNG is a key link between Australia and Asia's growing markets and a new ANZ report paints a very promising picture for the future of the local sector.

“It looks very similar [to past booms],” he told BlueNotes on video. “I think when we looked at the iron ore market [back then] a huge positive was China being net short that commodity for its steel demand.”

“Gas is in a very similar dynamic, with China net short gas and very long coal at the moment. The demand dynamic is really led by their ability to receive that gas which is something we'll see over the next decade.”

The report, Australia's gas industry - when markets collide, predicts Australian export volumes in LNG will spike as heightened capacity created by increased LNG investment kicks in. Australia could rival Qatar as the world's largest LNG exporter by 2018.

The report is bullish on the long-term global outlook for LNG and expects international prices to rise over the next five years due largely to Asian demand outstripping supply. This could lead Australia's LNG exports to triple or more in that time, overtaking iron ore as the country's key export driver.

“There's always that mismatch between supply and demand, particularly when you are talking about very large volumes in the case of LNG,” Pervan said. “It's the long-term strong demand outlook for cleaner energy, in this case gas, which makes it quite appealing.”

The news is not great for the manufacturing sector which will be hit hard by the price increase, especially companies in the chemicals and metals industries.

“There's a bit of a readjustment in the energy mix in the way of pricing,” Pervan said. “We've had an energy market here very much based around the demand in Australia. What we're going to see in the next decade is pricing being much more anchored to the regional and global demand story for energy.”

The report suggests without proper planning for these developments, Australia's heaviest gas-consuming groups could see their profits drop by a fifth and their return-on-equity halved.

The strain on domestic supply is also expected to force substantial increases in gas prices at consumer level as there is a risk wholesale prices could increase by 30 per cent in next two years if supply issues are not addressed.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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