Political headaches as China sucks up Australian coal, LNG: Russell
When is rising Chinese demand for your natural resources not a good thing? When you are Australian and higher prices for coal and liquefied natural gas (LNG) are causing domestic shortages and soaring electricity prices.
In theory it should be great days for Australia’s economy and resource companies, and even Australian politicians keen to take the credit for booming exports and the associated jobs.
But the world’s largest exporter of coal, and second-biggest of LNG, is discovering that export success can quickly become a politically-charged hot potato when it is linked to rising costs for local consumers.
First the three new LNG plants in the eastern state of Queensland were accused of sucking up natural gas supplies, driving up prices and potentially causing supply shortages.
This was a bit of a stretch as only one of the three projects was capable of using natural gas that may have otherwise been made available to the domestic market.
Still, the perception that LNG exports were driving domestic prices higher stuck, leading the Liberal Party-led federal government of Prime Minister Malcolm Turnbull to introduce a mechanism to divert natural gas to the domestic market if the demand is there.
It’s not clear whether this solution will work in practice, as the main problem appears not to be the domestic availability of natural gas, rather that the local price is effectively linked to what supplies can be sold for as LNG exports.
As one analyst put it, if natural gas is available in Queensland at the same price as LNG, and nobody wants it, is there still a shortage?
The situation has been complicated by governments in the populous states of New South Wales and Victoria, home to the major cities of Sydney and Melbourne respectively, acting to restrict or ban the production of onshore natural gas.
The natural gas industry has long argued that all available sources of supply should be tapped, as bringing more gas to market will help rein in prices.
But state governments have found it impossible to stand up to a coalition of environmental activists and farmers who are opposed to any onshore gas production, despite the overwhelming peer-reviewed scientific evidence saying the industry is safe as long as it’s properly regulated.
Australia’s LNG exports were 36.5 million tonnes in the first eight months of the year, according to vessel-tracking and port data compiled by Thomson Reuters Supply Chain and Commodity Forecasts.
This was up 35 percent from the 27 million tonnes shipped in the same period last year, with China contributing a large chunk of the extra demand.
Australia’s LNG shipments to China were 10.7 million tonnes in the first eight months of the year, up from 7.1 million tonnes in the same period in 2016.
Whether China is to blame for Australia’s rising natural gas prices is moot. What is certain is that the price increases have contributed to a sharp increase in the cost of electricity in Australia, reported by the Australian Broadcasting Corporation on Sept. 11 to be up 20 percent this year alone.
COAL BECOMING TOO EXPENSIVE
The other problem is the surge in the price of thermal coal this year, and here China does carry more of the blame.
Thermal coal prices for exports from Australia’s Newcastle port, the regional benchmark, ended at $103.15 a tonne on Wednesday, up 45 percent from the low so far this year of $71.30 on May 16.
Chinese import demand is driving the price higher, with restrictions on domestic output in China and higher demand boosting purchases by the world’s largest importer of the fuel.
China’s seaborne coal imports were 153.3 million tonnes in the first eight months of the year, according to Thomson Reuters data, up from 139.7 million in the same period in 2016.
Imports from Australia were at 58.3 million tonnes in the January-August period, up from 50.3 million in the same period last year, with the almost 16 percent rise being achieved despite disruptions to exports from a tropical cyclone in March.
Robust demand from Chinese and other Asian buyers is causing problems for Australian power companies, who are reluctant to match the prices they pay for premium-quality thermal coal.
The Australian Energy Council, which represents electricity generators, said many power plants can’t operate at maximum rates as they lack fuel, Reuters reported on Sept. 12.
That means expensive coal and natural gas are raising the threat of blackouts in the upcoming peak summer demand period of the Southern Hemisphere, likely creating further political headaches for those in power.
The main problem in Australia, however, isn’t that coal and natural gas have become more expensive in recent months, it’s the systemic failure of policymakers to develop a coherent vision of how the country will be powered.
At the federal level, the centre-left Labor Party introduced a carbon tax when it was in power from 2007 to 2013, which was scrapped by the Liberal government when it took power.
A renewable energy target is still to be finalised despite a major review of the country’s power sector.
The uncertainty has meant that investment in new generation to replace ageing coal-fired plants has been stymied, while politicians across the left-right divide argue as to whether coal should be front and centre in the future, or whether renewables backed by gas-fired plants should be the way to go.
To outsiders, it probably comes across as somewhat ironic, that the world’s top exporter of coal and soon for LNG as well, can’t actually meet domestic demand at an affordable price.
The real risk, though, is that in order to appease increasingly angry voters, politicians wound the golden export goose without actually solving any underlying domestic issues.
Source: Reuters (Editing by Tom Hogue)