Rudd gloom misses Australia's looming natural gas surge

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

SYDNEY — Prime Minister Kevin Rudd's strategy of centering an election pitch on his ability to steer Australia through the end of a China-led minerals boom is overlooking the next big thing: natural gas.

The Treasury two days ago forecast deeper budget deficits in the next three years as growth slows, unemployment rises and mining investment wanes, constraining Rudd and opposition leader Tony Abbott's election pledges. Whoever wins a three-year term at the Sept. 7 poll may find that gloom lifts from 2015 as a surge in gas exports replenishes Australia's coffers and propels the nation toward becoming the biggest shipper of the fuel.

The commodities "story isn't over, it's just changing its shape," said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney and a former Reserve Bank of Australia economist. "It's part of the reason we're still cautiously optimistic about Australia's growth prospects."

Ten liquefied natural gas projects across the nation — three of which are operating and seven under construction — will boost budget revenues by A$11 billion ($10 billion) a year from 2015 to 2025, according to estimates compiled by McKinsey & Co. Inc. The projects will add 2.6 percent to Australia's gross domestic product, or A$5,500 per household each year and support 180,000 jobs, the New York-based consultancy forecast.

While Rudd is talking up the risk of recession should Abbott's Liberal-National coalition win government and cut spending, the Treasury's projections reflect a turnaround seen starting from July 2015. In its Pre-Election Economic and Fiscal Outlook released Aug. 13, the Treasury forecast the budget deficit will narrow by almost A$20 billion between fiscal 2015 and 2016.

Australia's LNG export earnings are projected to increase fivefold to A$61 billion through June 2018, according to the government's Bureau of Resources and Energy Economics. BG Group Plc's venture on the coast of Queensland state is due to begin in 2014, and Chevron Corp.'s A$52 billion Gorgon project on Barrow Island off northwest Australia, the largest resources development in the nation's history, is scheduled to start delivering cargoes in early 2015.

Adelaide-based Santos Ltd. and a venture between ConocoPhillips and Origin Energy Ltd. are building LNG projects next to BG Group's plant on Queensland's Curtis Island, both targeting shipments in 2015. Inpex Corp. of Japan is developing the Ichthys project in northern Australia, while Chevron is also operating the Wheatstone development in Western Australia. Royal Dutch Shell Plc is moving ahead with the Prelude project using a ship to process the gas offshore, due to start in about 2017.

Australia's LNG developments typically have 20-year contracts to sell the commodity to Asian customers at oil-linked prices, underpinning "a long revenue stream for federal and state budgets," Catherine Tanna, chairman of BG's local unit, QGC Pty, said in an Aug. 1 interview. Tanna also sits on the RBA's board.

The seven LNG ventures, plus three already operating, are projected to contribute A$520 billion to GDP between 2015 and 2025, according to McKinsey. While a second phase of potential LNG ventures could contribute a further A$320 billion to the economy, high costs and increasing competition from North America may jeopardize the plans and economic benefits, it said.

"There's so much more on offer," said Michael Ellis, a partner at McKinsey. "If you look at the way mining investment is coming off and you look at the state of our federal budget, we are going to need as much as we can get, and the extra A$320 billion is likely to be even more important to us than the current suite of projects."

Companies including BHP Billiton Ltd. and Glencore Xstrata Plc have deferred building new mines and ports in the world's biggest exporter of iron ore and coal after commodity prices fell and costs rose. Resources projects worth about A$150 billion have been delayed or canceled over 12 months, with 14 fewer projects being developed as of April 30, BREE said in May.

Treasurer Chris Bowen projected a revenue shortfall of A$33.3 billion over the next four years from forecasts three months earlier. The government cut its growth estimate this fiscal year to 2.5 percent from 2.75 percent seen May 14 and said unemployment will rise to a more than decade-high 6.25 percent.

A decline in mining investment "presents a major headwind to economic growth and a challenge for policy makers and is a key reason why we think interest rates can remain low for an extended period of time," said Andrew Boak, a Goldman Sachs Group Inc. economist in Sydney.

Rudd, a Mandarin speaker who served in Australia's embassy in Beijing, has repeatedly said his nation faces "the end of the China mining boom." He has highlighted threats to Australia's economy since returning to the ruling Labor party's leadership on June 26 as he reframes the economic debate to remind voters of his management skills in his first stint as prime minister.

"Rudd is calling the end of the China boom to confect this semi-crisis for political purposes, allowing him to highlight his track record of saving Australia from recession" through the 2008-2009 financial crisis, according to Stephen Walters, JPMorgan Chase & Co.'s chief economist in Australia. "The RBA certainly hasn't called the end of the mining boom yet, and there's an export phase still to come."

In a televised leader's debate on Aug. 11, Rudd said China is "changing into a less resource-intensive economy" and Australia needed to diversify its own economy as a result. "This is the challenge of leadership now, to manage the transition," he said.

Abbott replied that such a view was "waffle" from Rudd. "If the mining boom is over, at least in part, it's because Mr Rudd's government has killed it" with new taxes, Abbott said.

The RBA cut its benchmark interest rate to a fresh record low of 2.5 percent this month, bringing to 2.25 percentage points of reductions since policy makers began easing in late 2011. While traders are pricing in a 58 percent chance the central bank will need to lower rates again this year, the median forecast in a Bloomberg News survey of economists is that the cash rate will remain unchanged through the end of 2014.

The LNG industry will spur Australia's growth, Goldman Sachs's Boak says, predicting it will add an average 35 basis points per annum to GDP over the next 10 years.

"Over such an extended period of time, it's enormous," he said. "There's no other single sector contributing anything like that. It's a once-in-a-generation dynamic."