Australia is on the cusp of a liquified natural gas (LNG) export boom, with volumes set to increase to 85 million tonnes per annum which will add around 0.6 percentage points to Australian GDP each year until 2018.
That’s the bullish call for Australia’s economy offered by Paul Bloxham, chief Australia and New Zealand economist at HSBC, who believes that Australia will soon overtake Qatar as the largest exporter of LNG globally as a result of a ramp up in production levels.
Bloxham notes that since 2009 there have been eight major LNG projects under construction across the country, costing more than $220 billion to build – an enormous amount for an economy the size of Australia.
While the winding back of construction is contributing to the sharp decline in business capital expenditure seen in recent quarters – dubbed the CAPEX “cliff” by some – with only one of these projects now complete, the economic drag created by falling CAPEX spending looks set to be partially offset by surging LNG export volumes.
Essentially the mining boom is not over by any stretch of the imagination, it’s merely moving from the construction to production stage. You have to build it before you can ship it, right?
The expected boost to Australian GDP from LNG export volumes is shown in the chart below.
Although falling energy prices will impact the profitability of many of these LNG projects short term, reducing overall income levels, Bloxham points out that the ramp up in LNG production will still be GDP growth supportive given it is measured in volume terms.
Here’s a snippet from a research note released by HSBC earlier this morning.
“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. However, production is still expected to ramp up. This is partly because these are highly-capital intensive projects with huge fixed costs, so reducing or cutting production only weighs even more heavily on profitability. Besides, these projects have also been built with 30-50 year production horizons in mind. Weak short-term profitability (or even losses) should not stop the ramp up in volumes on the assumption that, at some point, the plants will be profitable”.
“This is an important story that puts Australia in a different position to many other nations when it comes to trade,” states Bloxham, adding that while “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.”
While others suggest that Australia could suffer a recession as a result of the end of the mining CAPEX boom, Bloxham is “more positive” on the outlook for economic growth.
“Much of this positive view is due to the current upswing in the housing and services sectors, supported by low interest rates and recent falls in the Australian dollar,” he notes.
“The expected ramp up in LNG exports is another important element in the story that should not be forgotten.”
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