(The opinions expressed here are those of the author, acolumnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, July 27 (Reuters) - With commodityprices slumping, the local currency slipping and manufacturingjobs disappearing, Australians are starting to question whetherthey've backed the wrong economic horse.
The country's wealth and unbroken 24 years of economicgrowth have largely been built on exploiting natural resourcesand the happy coincidence of being close to China just as itsdemand for iron ore, coal and other minerals exploded.
But with China's growth slowing and many commodities instructural oversupply after resource companies over-estimatedfuture demand, Australia finds itself facing some uncomfortableissues.
Liquefied natural gas (LNG) neatly encapsulates the problemsfacing Australia.
A combination of international and local companies haveinvested about $200 billion in the past few years to massivelyexpand Australia's LNG capacity, building eight new projects.
This will more than quadruple Australia's output of thesuper-chilled fuel to over 80 million tonnes per annum, in theprocess overtaking Qatar as the world's largest producer andleaving regional rivals Malaysia and Indonesia far behind.
But much like iron ore and coal, it now appears that thedemand forecasts for LNG that underpinned the projects wereoptimistic, and producers are likely to find it increasinglydifficult to source buyers, especially for the part of outputthat isn't tied to long-term contracts.
Even the cargoes delivered into long-term contracts won'tdeliver the revenue that companies probably expected they would,given they are oil-linked and crude, in common with othercommodities, has slumped and the outlook remains soft.
Asian spot LNG prices
While major LNG investors such as Chevron, ExxonMobil, Royal Dutch Shell and Australia's Santos wouldn't have expected prices of around $20 per mmBtuto sustain, they could reasonably have forecast around $12-$14as a long-term price when they were making investment decisionsin the past five years.
NOT ALL BAD NEWS
While the slump in LNG prices has no doubt weakened theeconomics of the projects and increased the length of time itwill take to make positive returns, there are still positives.
Despite weak demand growth this year, longer-term forecastsare still bullish for LNG, even if they have been tempered fromthe wild exuberance of previous years.
ANZ Bank expects LNG usage in Asia will grow by 40 percentin the next decade on rising demand for cleaner energy.
This would allow Australia's LNG exports to triple to anannual value of more than A$50 billion ($36 billion), making thefuel the country's biggest export earner, overtaking currentnumber one iron ore and second-ranked coal, the bank said in areport released July 23.
But rising LNG exports are also a double-edged sword forAustralia as while they deliver export earnings and royaltytaxes for the government, they will also cause the price ofdomestic natural gas to rise to levels linked to internationalprices.
This means domestic wholesale natural gas prices may almostdouble, which could lower aggregate profitability ofgas-dependant manufacturers, such as chemical and metals, by 20percent, according to ANZ.
While the bank says this means manufacturers must adoptstrategies to mitigate higher gas prices, in reality this islikely to lead to further hollowing out of the industrial base.
The decade-long, China-inspired commodity price boom from2004 onwards resulted in the Australian dollar surging to arecord high of around $1.10.
In turn this put enormous pressure on import-competingindustries, with the most obvious casualty being vehiclemanufacturing, with the local units of General Motors, Ford andToyota all announcing an end to manufacturing by 2018.
While lower commodity prices caused the Australian dollar toslip to $0.7290 in early trade Monday, the risk is that the LNGexport boom once again renders industries uncompetitive, andonce factories close they tend to close forever.
There are also no major LNG projects likely to be builtafter the current wave, given the poor outlook for prices andincreased supply from the United States and potentially Canada,meaning the workers currently building plants will struggle tofind new jobs.
PROJECT PIPELINE EMPTIES
This is also the case in iron ore, where the mining giantsBHP Billiton and Rio Tinto have largelycompleted their expansion plans and are now seeking to cutworkers in a bid to lower costs in response to low prices.
In coal, the same dynamic is at work, with serious questionmarks now being raised over whether the new projects in theGalilee Basin in Queensland state will actually proceed.
India's Adani has stopped development work on itsplanned A$10 billion Carmichael coal mine in the Galilee,increasing speculation it's preparing to walk away from the40-million tonne a year project.
Australia also appears increasingly out of step with itsglobal peers on climate change, with conservative Prime MinisterTony Abbott lauding coal while decrying wind farms as "visuallyawful", and ordering a government clean energy financing agencyto stop funding wind and solar power.
However, the headline-grabbing issues don't quiteencapsulate some basic realities.
Australia is the world's largest exporter of iron ore, andwill most likely reclaim its top spot in coal from Indonesia inthe coming years.
It will become number one in LNG within three years andwhile green activists may not like these commodities, demand forthem is likely to remain robust for decades to come.
In the meantime, Australia is also likely to benefit fromincreased demand for agricultural products, as well as fromexport-orientated industries such as tourism and highereducation.
It's worth remembering two things from Australia's recenthistory.
In 1980, former Singapore prime minister and elder statesmanLee Kuan Yew said Australians risked becoming the "poor whitetrash of Asia." His warning that reform was needed to open upand innovate the economy was heeded and instead of fallingbehind the Asian tigers, Australia managed to increase livingstandards.
At the height of the technology revolution hailed by formerU.S. Federal Reserve chairman Alan Greenspan as a new economicparadigm, Australia was ignored by investors as an old economy,dominated by mining.
The tech wreck of 2001 and the rise of China brought the oldeconomy back into vogue, but the challenge for Australia is onceagain to navigate the turbulent waters of the commodity cycle. (Editing by Ed Davies)
