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A Storm Is Brewing In Asian LNG Markets

Few countries have profited from China’s rise as Australia has over the past decades. The insatiable appetite for raw materials such as iron ore, coal, and natural gas, has fueled the economy since the early 1990s. Recently, political tensions between China and Australia have led to a vicious circle of deteriorating economic and political relations. The most recent development being Beijing’s willingness to reduce LNG imports from Australia.

The two countries, enjoy a high level of economic complementarity, on paper at least. The booming Chinese economy requires vast volumes of raw materials which Australian companies can produce for competitive prices. If it weren’t for the challenge of maintaining stable political relations, trade between the countries would be a textbook example of economic cooperation. 

Canberra, however, has become wary of Beijing’s growing influence which it fears due to the authoritarian political system of the Asian country. The restrictive nature of the flow of information in the Chinese system and its failure to address the spread of the novel coronavirus on time was the reason for Canberra to call on an international investigation into the origins of the disease. Beijing was not amused by Australia’s assertiveness which it accused of doing President Trump’s bidding and damaging the countries’ relations ‘beyond repair’.

Last year China retaliated by barring specific Australian products such as barley and wine. The list was later extended with coal which is a much more important export product. Chinese importers have been trying to replace coal from Australia with supplies from Indonesia and Russia. With limited success though. Related: Secret Meeting Between Saudi Arabia And Iran May Trigger Major Policy Change

For example, the price of Russian coal with an energy value of 5,500 kcal/kg is being sold at $115/tons in June. The same product can be sourced from Australia for just $55 according to commodity price reporting agency Argus. The significant price difference shows China’s steadfastness when it comes to asserting its economic dominance in the region.

Recently, Beijing has found another ‘tool’ with which it can assert its interests vis-à-vis Canberra. The Australian LNG sector has gone through a remarkable period of growth during the past decade. The rise in production even dethroned Qatar as the world’s largest producer. Again, as in the case with other commodities, China is the kingmaker.

In the period until 2022, a remarkable 95 percent of growth will come from Asia in general and China in particular. The business of LNG is such that high upfront investments and offtake contracts are usually necessary to reduce risks and ensure profitability for investors. Therefore, China is essential for the sector which repeatedly faces oversupply.

Despite the deteriorating political relations energy trade concerning natural gas has been on the rise. Chinese buyers are importing record volumes from producers in Australia.

However, a storm is brewing. Last week Beijing suspended a formal economic dialogue mechanism and issued a warning regarding the buying of new cargoes from Australia. Although the message was aimed towards two smaller second-tier importers who satisfy just 11 percent of China's total LNG demand, it unequivocally shows that more is to come. The remaining 90 percent of imports are carried out by large state-owned companies. Beijing could impose an all-out ban the moment it sees an opportunity to source sufficient volumes from competitors. Related: A Rare Moment Of Stability For Oil Prices

Energy relations with Russia, for example, are already of strategic value to Beijing. China’s Silk Road Fund invested in the Novatek’s Yamal project in the far north. In addition, deals are already being signed for the future export of LNG from the yet-to-be-built Arctic-2 facility.

But the biggest challenge for Australia’s LNG sector comes from Qatar. Doha intends to increase production by 40 percent to 110 mtpa by 2026. The country is expected to announce another round of expansion this year to 126 mtpa by 2027. Therefore, in the long-term, there are multiple alternatives for Chinese importers.

While two decades ago western companies were at the forefront of the development of Qatar’s energy industry, China’s importance has become overwhelming for producers as demand in the Asian country remains strong. Chinese CNOOC’s CFO, for example, already declared that his company is “very interested” in Qatar’s gas projects.

These are bad signs for Australia’s LNG sector as political tensions won’t subside any time soon. While the western world and Australia are recovering from their ‘hang-over’ concerning economic relations with China, Beijing is also contemplating. This could lead to a reorientation of economic cooperation towards countries that are more friendly to Chinese interests and less vocal. Canberra is also not likely to budge. Therefore, expect Beijing to increase economic costs with Australia even as it hurts the Chinese economy to a certain degree.

By Vanand Meliksetian for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on May 25 2021 said:
    This the heavy price Australia is paying for doing former US president Trump’s bidding. The irony is that the United States has been supplying China with coal to replace the Australian coal exports.

    For its folly, Australia has lost its biggest trade partner. It will have to bite the bullet and apologize to China and also withdraw the request it made to the WHO to investigate the circumstance of the spread of the coronavirus from China if it is to restore its trade relations with China.

    Australia should realize that China as the world’s largest economy based on purchasing power parity (PPP) has the whole world as its oyster. It can easily secure all the goods it used to import from Australia from other countries.

    Qatar and Russia’s Novateck are only too happy to supply all the LNG China needs.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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