24 July 2015

Big LNG users tipped for profit hit as Australia’s gas exports grow

LNG will take over from iron ore as the main driver of Australia’s exports and will reach $50 billion in value by 2020, an ANZ report says.

But the growth is setting up the market for a “dramatic shake-up’’, with prices rising to a point where they will shave up to 20 per cent from the profits of heavy commercial users.

That led Manufacturing Australia to call for a “use it or lose it’’ policy to force gas companies to bring reserves to the market to avoid “a trainwreck coming down the line’’.

MA executive director Ben Eade said companies had already moved investment offshore because of the issue and that would only worsen if nothing was done.

The report says demand in the eastern states for gas will increase dramatically by 2017 due to export expansion which will soak up domestic supply.

“But an examination of the current break-even costs for LNG development together with low gas contract prices shows there is limited incentive to fund further expansions,’’ it says. “Those Aust-ralian manufacturers which are the heaviest users of natural gas, and cannot pass cost increases on to their customers due to international competition, will be hardest hit by the forecast gas price increases.’’

The impacts on business will be widespread and include food, beverage and grocery manufacturers as well as wood, pulp and paper manufacturers.

Iron and steel product manufacturing, non-ferrous metals and chemicals manufacturing will also be hit.

“If Australia’s major gas-consuming companies take no action ... within five years the aggregate profitability across the companies could decline by 19 per cent,” ANZ says.

“Return on investment could halve and total debt to EBITDA (earnings before interest, tax, depreciation and amortisation) leverage could rise by 13 per cent.”

ANZ said the expansion of LNG, a significant amount of which will come from Queensland, would have significant and long lasting benefits for Australia’s economy. By 2016 it will take over from iron ore, and Asia is the main customer.

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