While the focus of Australian attention on APEC was all about whether Tony Abbot would shirtfront Russian President Vladimir Putin over the Ukraine, in fact, it was Putin who delivered a vicious uppercut to Tony Abbott. It was a blow that will set future Australian LNG projects back a decade or two. This follows Putin’s earlier dairy blow to Australia.
LNG has been a major driving force behind the mining investment boom. At the start of APEC, Russia announced that it has reached a basic agreement with China to expand and accelerate the supply of gas from Siberia.
Russia’s Putin signed a framework agreement to accelerate supply by 30bcm of gas a year via the Altai pipeline. That’s about the equivalent of Australia’s entire LNG output and represents just shy of 20 per cent of China’s current demand. The Altai pipeline follows a much shorter route than the Western pipeline, which will deliver an additional 38bcm of gas a year -- a total of 68bcm by the 2020s. Add the planned US LNG exports, and China will only need top up gas, so there is no room for new Australian base load contracts unless Korea or Japan are prepared to commit. It's unlikely that they will be prepared to accept prices that exceed that of the Russian gas.
It’s also clear that Siberian gas via the Altai pipeline will be much cheaper than Australian LNG. Effectively, that means that there will be no more LNG projects, and, if oil prices remain depressed, then LNG revenue will be much less than originally expected.
Just to make sure Australia takes heed of Russian power, Putin also maintained his ban on Australian dairy exports to Russia but continues to allow New Zealand exports. As I pointed out last month, the ban on Russian imports of dairy products coincided with the tough measures against Russia taken by Europe after the Malaysian airlines crash (Putin's dairy war is hurting our farmers, October 14)
I don’t think the current government fully understands the extent of the end of the mining investment boom.
Had they understood what was ahead, they would not have been anywhere near as cavalier as they have been in encouraging the demise of motor production and the associated fall in high-technology parts operators.
Mining revenue has been a valuable addition to Australian taxation receipts for well over a decade, allowing former treasurer Peter Costello to always have extra funds to spend on new projects. Joe Hockey will not have that luxury.
The requirement to cut existing government outlays will intensify in coming years. The Australian population has simply not been told that it was the mining boom that delivered their bountiful rewards -- instead the politicians took the credit. Now, governments will have to tell the truth and explain that a different approach is going to be required from this country.
Of course, Russia has always been one of the main beneficiaries of the mining boom, so it will suffer from the current decline in oil prices. But the Russian ‘rubble’ is falling dramatically which will insulate Russia from the worst of the decline. Our dollar has fallen, but our rates of interest are higher than the US and Europe, so we continue to receive large amounts of capital.
I suspect the current Chinese Australian property investment momentum will continue for some time, but, eventually, the Chinese will find that those countries that are benefitting from the end of the mining investment boom are the best places to look for bargains -- that means the US, Mexico and, of course, China itself.