After Gas …

Macrobusiness has an interesting article on the potential for Asian gas prices to converge to US prices.

My guess is that the global shale boom means that the Australian gas investment boom is over. If the Japanese are successful in move pricing off Oil benchmarks it may be uncompetitive before the investment phase is even complete. Certainly, you would have to be an excellent salesman to persuade someone to sign a 30yr petroleum linked contract.

Because of this, it is hard to see another 200bn of gas investment replacing the current crop of projects. This means that mining investment as a share of GDP will drop a few percentage points over the next few years – the policy challenge is to replace that with exports, consumption and non-mining investment.

I am sceptical of the ability of monetary to do this – i suspect that we will require one of a much lower currency or looser fiscal policy (i favour infrastructure investment).

… Meanwhile in coal, i’m hearing of more mine closures from family in the business.

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16 Responses to After Gas …

  1. Rajat says:

    We managed fine without a mining boom in the late 90s and early noughties – mainly by building houses. Yes, the AUD was lower, but so it would be again if monetary policy were looser. Unfortunately, our RBA is now a reluctant rate cutter and seems determined to condition us to 3% nominal growth and all that goes with it. In Japan, even the chance of looser policy under a new PM provokes a substantial fall in the Yen and rise in the Nikkei. And looser fiscal policy without looser monetary policy just leads to crowding out, a la Japan.
    But out of interest, what infrastructure would you build? Public transport is one thing that comes to my mind, because provision is currently limited by state governments’ budget constraints, rather than any real measure of willingness to pay. We would probably need to be willing to allow peak fares to double to make it worthwhile. And then driving starts to look attractive…. until perhaps we have congestion charging…

    • ssec says:

      “We managed fine without a mining boom in the late 90s and early noughties – mainly by building houses … ”

      That was the pre-GFC world… but we live in a different world now…. debt is out of fashion.

  2. On your Marx says:

    Just how different can government policy be?

    After All the $A should be much lower but it isn’t because overseas investors just love our bonds and thus our economy.

    Cash rates are pretty low yet consumption is tepid rather than charging!

    I know blow the budget!!

    Rajat , Adam Posen looked very close at Japan and found NO crowding out!!

    Crowding out is usually found in a strong economy not a weak one.

    • Rajat says:

      I had a look at Kuttner and Posen (2002). They said that, “fiscal policy has been
      generally contractionary since 1997.” Maybe, but that’s still many years of stimulus with little to show for it. When I said crowding out, I didn’t mean through higher long term interest rates. Rather, higher government spending must mean lower private spending if the central bank targets inflation or any other nominal variable. That is true in a weak economy as much as a strong one.

  3. On your Marx says:

    sorry but to ensure people understand properly the irony button was on in my previous comment

  4. ssec says:

    The dilemma is: the AUD won’t come down unless markets start pricing in a real risk of significant recession in Australia, but it’s a lower AUD that can save us from that recession.

    Even C.Joye is now a dove….. (as if the capex report was a surprise, are the manufacturing problems new???) ….. but the AUD is still up there!

    http://afr.com/p/blogs/christopher_joye/december_rate_cut_firmly_in_frame_3ClrejIZh89Yo8apMlVOMI

    • ssec says:

      PS: the market solid rally today is due entirely to increased expectations of a rate cut next week…. the AUD however won’t move. One of the reasons is that it’s quite rare for the ASX200 to go up and the AUD to go down, due to foreign money coming into AUD shares. And that is another paradox: worsening economy = rate cuts = market going up = supportive of AUD = worsening economy!

  5. On your Marx says:

    Which brings us back to what policy could change it all apart frorm blowing the budget

    • ssec says:

      Honestly I am not sure we would want to change it right now…. We would not want to be like one of those doctors who, on the first day of a viral fever, immediately prescribes antibiotics … wait and see … for now …

  6. 3d1k says:

    LNG market is undergoing rapid expansion and commensurate evolution of pricing models. Japan has already voiced interest in breaking the oil pricing convention (in practice contracts are negotiated with both discounts to oil parity and ceiling limits to protect purchaser from oil-shock cost scenarios). But no doubt, momentum is building for moves to more market oriented pricing – nonetheless many of the Australian LNG projects have or are in the process of securing long term contracts with key Japanese, Korean and Taiwanese markets. Full development of the US LNG market is several years away (5-10) – I linked to a couple of interesting reports at MB, worth a look. As is this ‘primer’ which gives an explanation of current pricing regimes and a reasonable enough assumption as to likely changes or otherwise – a couple of years old now but the basics are valid (eg Chevron Gorgon project unlikely to be constructed any time soon). I like this little report as it shows the complexities of the market, the huges sums required for investment, the uncertainties and the risk.

    http://www.natgas.info/html/gascontracts.html

  7. On your Marx says:

    did anyone notice that inflation in the construction is very mild.

    I think the large increase in costs in this industry is worth a very close look.

  8. ssec says:

    A rate cut next week is now a certainty. Especially since after that decision, we have a two-month break. Further cuts data dependent IMO.

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