From today’s AFR, a very scary situation for Australian manufacturers to be in.....
I work at a company which purchases material from Qenos, which is qouted in the AFR article. If Qenos’ Chinese parent decides to cease manufacturing plastics in Australia, the flow on effects of this will be felt across the whole country, in every sector.
Article:
Industrial gas users representing more than 10 per cent of east coast domestic demand are at risk of closure because of high gas prices, with upward pressure on tariffs only set to worsen, according to leading industry consultancy Wood Mackenzie.
Senior analyst Saul Kavonic said the most at risk are about seven larger gas buyers in industries such as ethylene, ammonia and fertilisers production that use the fuel as one of their primary inputs and which are seeing legacy cheap supply contracts come to an end. Jobs in the industries are thought to reach into the thousands.
Competition czar Rod Sims earlier this month pointed to "the very real prospect of more industrial closures" as historical gas prices of $3-$4/GJ are replaced by new contracts priced at $8-$10/GJ. While prices for new supplies have moderated from the extreme $20/GJ rates quoted early last year, commercial and industrial customers for gas are still experiencing a "massive price shock," he said.
"We forecast gas prices are to rise further next decade as LNG prices rise, gas transport and storage infrastructure becomes increasingly congested, legacy gas supply in the south declines further and the cost of new marginal supply increases," said Mr Kavonic ahead of the Australian Petroleum Production & Exploration Association annual conference, starting in Adelaide on Tuesday.
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"Gas buyers who are struggling with current prices face even bleaker prospects as prices rise further next decade – an inevitable result of Australia's cheap legacy gas sources running out, and the cost of new supply being structurally much higher than in the past."
'Big questions'
Gas prices on the east coast have soared as demand trebled with the start-up of LNG exports from Queensland just as the collapse in oil prices cut drilling budgets and some states and territories imposed drilling bans that locked up their onshore gas resources.
Production from the south-east's biggest producer, the ExxonMobil-BHP joint venture in the Gippsland Basin, is set to see a 26 per cent drop in output this year from the 2016-17 record, with only small new supply sources coming online.
While the federal government has sought to increase east coast gas supplies by threatening to curb Queensland LNG exports under its Domestic Gas Security Mechanism, prices for new contracts still remain at least double prices of some expiring contracts.
Whether prices of $8-$12/GJ are bearable depends on the type of industrial user, with gas-intensive industries producing low value-added product most at risk, according to the Australian Industry Group. It noted that prices – while well below last year's extremes – are double to triple their long-term average.
"If prices stay around this level, businesses with high value-added products and low to moderate gas intensity may well adapt, helped by energy efficiency and fuel switching," said Innes Willox, chief executive of Ai Group.
"But gas intensive businesses with more commoditised products will face big questions about the viability of reinvesting in their eastern Australian operations.
Reform needed
Mr Willox said that unless market reform options are found that sustain lower gas costs, "we still face losing significant parts of our current industrial base."
Large gas user Qenos, which makes ethylene and the basic plastic polyethylene, has described $10/GJ gas prices as "unsustainable", with chief executive Stephen Bell saying the Chinese-owned company can neither absorb the cost increases nor pass them on to its customers.
The gas users are closely watching proposals by at least three separate ventures to import gas into the south-eastern states, although Mr Bell does not expect LNG imports to be affordable and is more positive about the potential for a gas pipeline from Western Australia to the east coast.
Results of the initial evaluation into a West-East pipeline are expected to be released as early as this week. Despite broad scepticism about the potential $5 billion pipeline, consultancy Rystad has released analysis finding that WA gas delivered through such a project could undercut imports especially as LNG prices are expected to rise by the time the pipeline could start up in about 2023.
Rystad estimated that WA gas could be delivered into the east coast grid through a pipeline at $7-$7.50/GJ, compared with about $12.90/GJ for imported LNG. But the firm said it remained to be seen how many large gas consumers were willing to commit to long-term purchase deals to underpin such a project, while on the supply side, the expected higher price for LNG next decade would increase the opportunity cost for WA producers to sell gas into the domestic market rather than export it.
AJQ Price at posting:
9.4¢ Sentiment: Buy Disclosure: Held
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