East coast gas pain from 'outrageous' to 'unsustainable'
by
Chanticleer
The competition regulator
might have found that eastern Australia has enough gas to get through 2019, but don't think for a moment that things are improving for the big business users that are so vital to our economy.
"At best, short-term spot prices may have eased slightly and contract offers decreased from 'outrageous' to 'unsustainable' for large manufacturers for 2018-19 only," one commercial and industrial gas user from the southern states told the Australian Competition Consumer Commission during the compilation of the
latest instalment its rolling gas inquiry.
ACCC chair Rod Sims says that scale – from outrageous to merely unsustainable – isn't a bad reflection of the market.
"In 2017 the prices were outrageous," he told Chanticleer on Thursday morning. "That was sheer profiteering by people who had a lot of market power. That was outrageous." But following the dramatic government interventions seen last year, at least some of the pain has been taken out of the gas market on the east coast.
Prices have dropped from $20 a gigajoule in early 2017 – when the giant LNG gas chillers in Gladstone were running at full tilt, to the detriment of supply to the domestic market – to between $8 and $11.
Still, that's two or three times higher than historical levels. Sims says many gas users, such as chemicals or fertiliser makers, for whom gas can represent 30 per cent to 50 per cent of their total costs, will find those sorts of price increases unsustainable.
But even for companies for whom gas is 5 per cent of costs, Sims says coping with a price increases of two-and-a-half times is "bloody hard".
"For many players, there's your profit margin gone, or more," he says.
Heading into earnings season, it's also fascinating to read the ACCC's report into how big industrial gas users are faring in negotiations with suppliers.
It's no surprise that suppliers hold much of the power in a tight market, although gas users are at least getting around three offers when they go to the market.
But most gas users haven't secured supply for 2019, with negotiations continuing for a variety of reasons.
Some gas users are hoping – probably incorrectly – that despite the improved outlook for supply, the government will choose to trigger the Australian Gas Security Defence Mechanism, which is designed to boost domestic supply by limiting gas exports.
But other buyers are betting that the high prices are here to stay, and so want to spend time negotiating to lock in the best possible deal they can find to try and protect themselves over the longer term.
And that's what we shouldn't forget here – the long-term damage that these gas prices risk.
Big gas users in Australia cannot simply pass through higher gas costs through prices rises, because most are competing in global markets.
Gas users are making efforts to reduce gas usage, or switch to alternative supply models, such as getting gas straight from producers. But as one user said, "each additional mitigation project has ever decreasing returns for each dollar invested".
These big manufacturers will need to start making decisions about the future of their operations. And these are decisions that will have broader affects on the Australian economy.
Sims says
the four different proposals for LNG import terminals,including from AGL, an Andrew Forrest-backed group and a team of former BHP executives, are a good development for the market, although he emphasises only one or two of the four are likely to get up.
He says the terminals – which bring in gas from overseas to port facilities – could play an important role by effectively capping the domestic gas price as the export parity price.
"The good news if you will won't have 2017 happen again…but it won't give you cheaper gas, it won't give you gas below export parity."
But it won't solve the longer-term problem on the east coast, which, for all the action of the last 12 months, doesn't feel much closer to being resolved.
"The point we keep making if you want to get a better market and you want lower prices, the only way you are going to do that is to get more gas down south."
And that ball remains very much in the court of state governments – who so far haven't come to the party to the extent the market needs.
James Thomson
[email protected]
