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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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Australian LNG Exports To China Are Bouncing Back

The relationship between Australia and China has been going through a difficult period lately. Altercations surrounding the origins of COVID-19 rage on, all the while China has found ways to curb imports of Australian coal, oil and LNG to demonstrate that it would not refrain from weaponizing energy trade if it considers such steps to be necessary. Not every segment of bilateral trade was as impacted as hydrocarbons were – China was tangibly more prudent with iron ore as roughly two-thirds of its monthly needs come from Chinese companies; any replacement thereof would ramp up logistics costs and thus render the operation of steel mills less efficient. The first of the banned hydrocarbon “triad”, Australia’s LNG exports to China are bouncing back to normalcy, i.e. the period before COVID politics got involved.

Graph 1. Australian LNG Imports to China in 2019-2021 (million tons LNG).

Source: Thomson Reuters.

The main thrust of the Sino-Australian confrontation – coal exports – has barely changed over the course of 2021. In April, just as in January 2021, there were only 3 cargoes of coal from Australia to China. A year ago, in March-June 2020, the monthly number of cargoes would oscillate between 60 and 80. Banning Australia did not alter Chinese appetite for coal, only transformed trade flows so that now Beijing buys increasingly more from the United States. Australian exporters, on the other hand, have seen their exports to India surge beyond expectations, largely aided by the subsequent drop in prices. Such an outcome benefits neither side; Chinese buyers are compelled to buy lower-quality coal for a higher price, whilst Australian producers receive less income than due amidst a constrained playing field. Against this background it should not come as a surprise that the geopolitical feud continues to rage on. Related: Russia Boosted Oil Production In April

Australia’s federal government has cancelled a 2018 agreement between the State of Victoria and the National Development and Reform Commission (NDRC), China’s economic planning agency, this April. Concurrently, one of Australia’s powerhouse states, New South Wales, vowed to pay off China’s state-controlled mining company Shenhua 100 million AUD for cancelling the proposed Watermark thermal coal project. Although the government of NSW closed off the entire Liverpool Plains region from further coal projects, i.e. not only Chinese investors will have suffered a setback, in the heated atmosphere of confrontation such steps might be perceived as provocative. Now, seeing the tensions between Australia and China, it is all the more surprising to see LNG flows between the two nations doing so well.

Obviously, the LNG rebound owes its success to two main factors – ample LNG being available and LNG prices being reasonable for the buyer. When it comes to the first criterion, it needs to be highlighted that the total volume of LNG cargoes leaving Australia in March 2021 (i.e. the ones that would most probably arrive to China in April 2021) reached an all-time high of 7.2mtpa. Of this, 2.96 million tons LNG went to China, equivalent to 41% of the total. For reference, the erstwhile top result was 6.93mtpa in March 2020 (34% went to China), meaning that this March producers of liquefied gas in Australia were firing on all cylinders. Cargoes loaded in April 2021 (most of April-loading cargoes will see their vessels arriving in May 2021) have heretofore provided for the second-highest monthly volume in history, attaining 7.01 million tons LNG per month.

Thus, Australia had sufficient LNG volumes to dispense with, moreover after the January 2021 cold snap Asian spot markets predictably nosedived, providing for favourable LNG tanker freight rates and relatively low spot prices. The surging Australian cargoes have heated up Asia’s LNG market, implying that China’s May 2021 LNG imports from Australia are poised to drop month-on-month. First and foremost, as was already insinuated above, China landed LNG prices have crept up. Throughout March landed prices hovered around the 6 USD per MMbtu mark, however, since mid-April they’ve spiralled up to 8.5 USD per MMbtu. This should weaken Chinese buying interest – seeing the wider regional trend with South Korea and Japan also buying less, weaker demand certainly seems to be the new reality. Related: China Snubs U.S. With Huge Iraqi Gas Deal

Second, Australia’s LNG production has dropped in April on the back of the 3.7mtpa Darwin LNG going into a week-long maintenance which has seen output going at a reduced rate. Third, shipping costs have gone up substantially over the course of the last weeks. If end-March has seen tanker day rates around 30-32k USD per day, at the end of April carrier rates spiralled up to 60k USD per day. Bunker fuel rates have also gone up, meaning that the overall shipping costs are 20-30 cents per MMbtu higher now than one month ago, assessed around 0.7 USD per MMbtu. Australia has 3 LNG export terminals across its territory – the 9mtpa Australia Pacific LNG (in which Sinopec is a shareholder), the 8.5mtpa Queensland Curtis LNG and the 7.8mtpa Gladstone LNG.

The chances that Australia will have another export terminal are rather slim, on the contrary, Australian authorities are currently assessing 5 different projects for a new LNG import terminal. Australia’s Energy Market Operator estimates that gas production in the Gippsland Basin, the legacy gas-producing region of the country’s southern part, will get depleted faster than initially anticipated, portending the need for an import terminal in the country’s south (of the 5 proposed projects 2 are located in Victoria, 2 in NSW and 1 in South Australia). Although Australia has been making significant headway with its renewables, its aggregate gas demand is expected to remain more or less the same through the mid-2020s.

By Viktor Katona for Oilprice.com

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