FIN Review: Threats to our LNG future

Australia was not the first mover in selling liquefied natural gas to Asia. Indonesian, Malaysian, and Middle Eastern shipments to Japan, South Korea and Taiwan were all well-established by the time Australia started exporting gas to Japan in 1989. But Australia is set to end up as the biggest player at the table. It has transformed the world’s sixth largest reserves of gas into the biggest export presence, growing from 7 per cent of the market in 2000 to 25 per cent by 2018 to displace Qatar from the top spot. Gas-based projects now make up the vast bulk of the remaining spending on the now-receding Australian resources boom. Out of $268 billion worth of resources investment still under construction, $205 billion is in energy, according to the Bureau of Resource and Energy Economics.

LNG is the most fascinating of supply chains. Billions of dollars worth of engineering in undersea wells, pipelines, giant liquefaction plants and specialised ships -just so that somebody can boil a kettle in Tokyo or Guangzhou.

Australia’s problem is that it has also made itself the most expensive builder of supply chains of this sort, and that is now threatening its future place in this crucial part of the world energy industry.

Just as with iron ore, massive investment in creating a worldscale supply industry has also pulled in huge uncontrolled costs in its wake. Some of the investment growth recorded in LNG is actually $20 billion in accumulated cost blow-outs, not extra value. Chevron Australia head Roy Krzywosinski says Australia has a window of only 18 months to two years to make itself competitive again, or risk being frozen out of the next wave of LNG development set to be worth another $150 billion.

Gross underestimates of project costs are nothing new in the global LNG world. But disturbingly, consultant McKinsey predicts that for the next round of investment, Australia is already 30 per cent more expensive than rivals, much of it for self-inflicted reasons of labour cost, tax and greentape regulation.

The Australian dollar, pushed up partly because of the resources bonanza itself, is a problem but hardly the only one. As the investment has poured in, labour productivity has not matched it, with output per dollar falling well below the US and Canada. The antics of unions such as the Maritime Union of Australia in extracting ridiculous concessions from contractors on energy projects cannot be allowed to survive into the next round of LNG investment or it might be the last. Moreover, Australia will not have the pricing power over gas supplies that it has had in the recent past to cover up indulgences on costs.

Brand new projects built from scratch onshore are already considered to be too expensive to do again. Future projects will either be expansions of existing facilities which can use existing infrastructure, or else floating plants that can be built to a standardised design and moved on to new developments later.

But if Australia wants to keep getting even such projects, it must get its house in order. No less than Shell’s global boss, Peter Voser, said on Monday getting the tick for future investment means getting tax and regulation right. New energy minister Gary Gray also conceded, given the scale of spending on LNG, “unreasonable” pay increases not linked to productivity could not go on. But the complacency of ministerial colleague Anthony Albanese in dismissing warnings on investment, and pointing to what we already have, shows some in the federal government do not get it. One of the benchmarks for any new government in Canberra after September 14 will be whether they can create the settings that will keep our LNG boom going through another cycle. There will be more competition. The Americans will have to turn to exports to justify more investment in their faltering shale gas boom. They will not be shy of a bit of gas diplomacy, and using energy supplies as extra carrots in wider trade deals that we’ll have to be sharp to match.

Newspapers getting it wrong on the never smooth resources boom

Writing about the Australian economy and in particular the resources sector is way too important to be left to newspaper journalists. Somebody competent should be doing it.

Not a day goes by without an over-rated hack with “editor” in his or her byline – economics editor, small business editor, deputy resources editor, acting deputy rural editor – declaring the resources boom to be over.

A total of 73 mining, gas and infrastructure projects costing $268 billion are under construction but, according to nine out of 10 journalists who misquoted the Bureau of Resources and Energy Economics, this constitutes the end of the boom.

Imagine how big it was before it finished.

Are we so desensitised by the numbers attached to mega projects that proliferate in this country that $268 billion in investment is interpreted as a slump?

Of course, the BREE report did not declare the end of the resources boom, as many print journalists so dishonestly claimed. When a journalist for The West Australian, Shane Wright, wrote “The resources investment boom is over, a new report has found” he was being inaccurate. That wasn’t the finding of the BREE report, it was Wright’s own spin on the report content, for the sake of a cheap headline.

He also stated, inaccurately, that the “figures show for the first time since the boom began that the value of new mining and energy projects is falling”. This ignores events around 2008 when the GFC caused many resources projects to be deferred or scrapped. Many journos declared the end of the resources boom then as well – not to mention myriad predictions of recession and double-digit unemployment.

But, despite the global economic calamity, the resources sector bounced back, stronger than ever. And will do so again.

The basic message in the BREE report is that an unprecedented $394 billion has been spent developing 390 resources projects since 2003. The great bulk of that is the $268 billion invested in projects currently still under construction.

Based on the current status of known projects, this will drop to $256 billion by the end of the end and then to $248 billion in 2014.

If no new projects are announced, and if none of the projects currently rated as “deferred” came back on line, investment will be about $70 billion in 2017.

A couple of things about that. The $70 billion figure is where things were at in 2007, when it was considered to represent the mother of all booms amid a raging national economy. We’ve become a little blasé about the enormity of the numbers since.

But that figure assumes no new events or no resuscitation of projects that have been sent back to the drawing board as mining companies seek to reduce costs – projects like the expansion of Olympic Dam, the Browse Basin gas project and expansion of port facilities at Port Hedland.

I’m pretty sure that a lot more than $70 billion will be pouring into resources projects in 2017. So too is BREE. The fine detail in its report, overlooked by many journalists seduced by the opportunity to declare the boom over, suggests that 120,000 new jobs could be created in the resources sector in Queensland and New South Wales alone over the next 10 years.

If all potential projects go ahead, another $270 billion will be invested, creating 80,000 jobs in construction and 40,000 in operation.

BREE resource manager John Barber says: “The resources boom is progressing. We’re turning that investment into projects that will deliver economic benefits such as jobs and revenue to Australian economy for years to come.”

Consulting group Wood Mackenzie has published an optimistic outlook for the resources sector, particularly for oil and gas. It says there is unprecedented spending in this sector and expects it to continue.

“The outlook for the next three years confirms the strength of the Australian resources sector,” it says.

Wood Mackenzie’s Gero Farruggio sees Australia’s dominance in iron ore increasing, taking its share of global seaborne trade above 50% by 2016. He also says the resumption of deferred coal projects and the development of new projects will keep resources spending strong through to 2017.

Wood Mackenzie sees investment in iron ore, gas and coal remaining high for at least the next three years.

The resources cycle is never smooth but the current boom in Australia, which started a decade ago and has persisted despite the GFC and the fluctuations in commodities prices, will continue to drive the national economy and many of its property markets.

Terry Ryder is the founder of hotspotting.com.au

Big spenders heralding a market revival in Queensland

MORE than $24 million in apartments have sold in just eight weeks as buyers go on a spending spree between Brisbane and Mackay.

Developer Reed Property Group has sold more than 60 apartments in four projects since early March.

Sales and marketing manager Jason Kollanyi said the results indicated a clear revival in the local market following the post-GFC struggle.

The developer has only one property remaining at The Parks in Sippy Downs, with construction due for completion next month.

“We have strong sales from Rivermarque in Mackay, which is currently under construction and attracting buyers from across Australia and oversees,” Mr Kollanyi said.

Emporio in Maroochydore, and the Belise in Brisbane have also had strong sales.

Construction on both projects is expected to start later this year.

The average price of sold units was less than $400,000, with the lowest priced at $225,000.

Mr Kollanyi said positive cash-flows on many of the properties had contributed to the sales figures.

“The current market offers affordable pricing made even more attractive by the possibility of getting returns in the first year of owner-ship.”

He said the recent interest rate drop also indicated a “very positive outlook for property sales going forward”.

http://www.perthnow.com.au/realestate/buying/big-spenders-heralding-a-market-revival-in-queensland/story-fnhlgp6j-1226651113183

Gladstone defies doomsayers with 24% gain in annual median house prices with Moranbah also strong

Talk of the mining boom effect petering out in perennial property hotspot favourites Gladstone and Moranbah in northern Queensland appears premature with both bucking the trend of property markets that soar one year only to fizz out the next.

Property Observer analysis of the 15 best performing detaching housing markets across five house price brackets published last May by Smart Property Investment magazine now one year on, shows that nine markets went from boom to bust in the space of a year, two tread water and three grew strongly, albeit at slower rates in the prior year.

The biggest boom to bust occurred in Quindalup, a small town in the South West region of Western Australia in the shire Busselton and about 250 kilometres west of Perth, most famous as the hub of a thriving timber industry from the mid to late 1800s.

Just a few original buildings remain, including Harwoods Cottage, now a local tourist attraction.

Based on annual sales data, RP Data figures show that Quindalup median house prices rose 47% to Feb 2012 but then fell 38% in the twelve months to February 2013.

Double-digit corrections also occurred in Netherby, a suburb of Adelaide, Sydney’s prestige McMahons Point on the lower north shore (though from a small number of prestige sales), Dicky Beach, a suburb on the Sunshine Coast, East Launceston in Tasmania, Alton Downs near Rockhampton and Shorewell Park on the north coast of Tasmania near Burnie.

However, Gladstone City median house prices (the greater Gladstone area) have risen 24% over the 12 months to February 2013 following a rise of 32% in the previous months to a median of $600,000, albeit off just 17 recorded sales.

And in Moranbah, house prices rose 17% over the 12 months to February 2013 following a 33% in the previous 12 months to rise to $740,000 from 159 sales.

The third location to register two consecutive years of strong price growth was Millthorpe in NSW, a tiny hamlet between Orange and Blayney with 1,100 people, with price gains of 31% in 2012 and 13%.

State Suburb Annual sales to Feb 13 Median price Feb 2012 Median price Feb 2013 Median 12mth growth to Feb 2012 Median 12mth growth to Feb 2013

BEST PERFORMING SUBURBS $700,001 plus

WA

Quindalup

12

$970,000

$565,000

47%

-38%

SA

Netherby

19

$970,000

$800,000

39%

-18%

NSW

McMahons Point

16

$1.92m

$1.6m

33%

-17%

BEST PERFORMING SUBURBS $500,001 – $700,000

WA

Derby

42

$555,000

$542,500

40%

0%

QLD

Moranbah

159

$610,000

$740,000

33%

+17%

QLD

Dicky Beach

20

$660,000

$562,500

28%

-15%

BEST PERFORMING SUBURBS $400,001 – $500,000

QLD

Alton Downs

13

$480,000

$430,000

38%

-10%

TAS

East Launceston

44

$478,000

$385,000

33%

-19%

QLD

Gladstone City

17

$482,500

$600,000

32%

+24%

BEST PERFORMING SUBURBS $300,001 – $400,000

SA

Munno Para

92

$322,827

$307,500

42%

+1%

NSW

Millthorpe

12

$330,000

$372,500

31%

+13%

NSW

Wyee Point

17

$380,000

$377,500

31%

-1%

BEST PERFORMING SUBURBS UNDER $300,000

TAS

Shorewell Park

18

$246,000

$207,500

47%

-21%

NSW

Boggabri

21

$157,500

$153,000

45

-6%

TAS

Trevallyn

98

$290,000

$279,500

26%

-7%

Source: RP Data/Smart Property Investment magazine 

The most up-to-date price growth for these suburbs and all others can be found on our RP Data suburb data property map.

Median Rental Prices in Qld

Just found this great link at Residential Tenancies Authority (RTA) Queensland where you can enter the postcode, dwelling type (house, townhouse, units, etc…), and quarter – and it will tell you the median rent based on your query.

http://www.rta.qld.gov.au/Resources/Median-rents

There’s also a downloadable MS Excel version of the data as well if you like sniffing around at hat level.

http://www.rta.qld.gov.au/Resources/Median-rents/Median-rents-quarterly-data/

 

 

 

China to regulate higher coal import standards

Australia produces higher quality thermal coal than its export competitors, a point of difference that will see the struggling sector benefit if China pushes ahead with plans to lift import standards.

According to reports from news agency Platts and The Australian, draft regulations have been released to the local coal industry by China’s National Energy Administration banning the import and domestic delivery of poor-quality thermal coal.

The regulations which ban coal with a net calorific value of 4540 kilocalories per kilogram or less, would favour Australian coal at the expense of our main coal competitor Indonesia.

But it doesn’t take out coal players like Russia and America who also produce high quality coal at a cheaper price.

Russia also has the added benefit of lower transport costs, being able to utilise rail haulage to move large quantities.

Some analysts say there is also a chance Chinese domestic production could fill the void.

Macquarie Bank said that while this measure has been floated before, domestic coal producers were supportive and previous concerns raised by utilities now appear to be silenced.

“If executed, this legislation could be the market-changing catalyst thermal coal has been desperately seeking,” Macquarie said.

“Implementation in some form is probable rather than possible.”

The move to regulate quality standards is thought to be driven by rising pollution concerns, and a desire to protect the profits of large Chinese coal producers from lower-priced imports.

NSW and Queensland black thermal coal exports generally have an energy content above 5500 Kcal/kg, which compares favourably to Indonesian coal which has an estimated range of between 4200 and 5200.

Macquarie said if the regulation measures go ahead, about half of Indonesia’s coal exports or around 50 million tonnes could either flood other markets or be forced to slash production.

Under the terms Australian coal would potentially be required for blending with Chinese domestic coal which would have a positive impact on prices.

Recently Australia’s coal industry has been under mounting pressure, struggling to compete with lower production cost countries, resulting in jobs being slashed across the NSW and QLD coal districts.

Earlier this year Australian Mining reported the country’s coal sector continued to battle increasing operation and labour costs, facing strong international competition and a stubbornly high Aussie dollar, which this week has dropped below parity delivering bigger miners some relief.

Nikki Williams, CEO of the Australian Coal Association, said earlier this year that the Australian coal sector is at “a terrible junction where not only has the international market come off in terms of prices, but our costs and productivity have gone to a terrible place”.

It was only five years ago that Australia was considered one of the most economical places to produce coal in the world: At the start of 2013 Australia was labelled a high cost producer at $176 a tonne; at the time the rest of the world was sitting at around $106 a tonne.

Late last year American coal conglomerate Alpha Natural Resources even credited Australia’s rising costs for the US’ boost on the global coking coal market.

“The fact is that their cost inflation has been so rapid that it is actually improving the US’ relative position in the global seaborne metallurgical market,” the group’s vice-president of investor relations, Todd Allen, said at the time.

Allen said that recent cost inflations have far outstripped that of the US and Canada, attributing the rising costs to changes in federal and state government regulations and the inflated cost of labour.

Macquarie said that in the short term the direct price effect from Chinese regulation changes wouldn’t be seen but the end result should benefit higher quality coal producing countries like Australia.

“In addition, it helps raise the prospect for further Chinese investment in higher-quality overseas assets, just at the same time as the Koreans are taking the same approach,” the company said.

http://www.miningaustralia.com.au/news/china-to-regulate-higher-coal-import-standards

CSG projects to intensify rental pressure: report

A property report commissioned by the Surat Basin Property Group has found Western Downs communities are under enormous rental pressure similar to Moranbah.

The report found acute shortage in the availability of residential accommodation in the area and the situation was going to get worse as coal seam gas projects increased, The Chronicle reported.

Surat Basin Property Group CEO Jason van Hooft said this was the most detailed report compiled on the Surat Basin housing market.

“We saw a huge gap in the data being produced in relation to growth figures in the Surat Basin,” van Hooft said.

“The problem has been planning. Some planning has been done which is just incorrect. The thinking and infrastructure needs are simply not there.

He said the Western Downs Regional Council has not allocated resources where it is needed.

“It is no secret the Western Downs Regional Council is struggling with a boom and their resources are being severely stretched.”

Van Hooft believes the focus should be on places like Miles, Chinchilla and Wandoan, not Dalby.

He said Miles and Wandoan were already facing acute shortages, with soaring prices as a result.

“A house was only recently rented out in Wandoan for $3000 per week,” he said.

“A four-bedroom house in Chinchilla is fetching $1000 per week. If nothing is done we will see immense pressures placed on these towns and communities similar to the cycle Moranbah is experiencing.”

The report was compiled by property advisory consultancy firm MacroPlan Dimasi. The findings were given at a Toowoomba and Surat Basin Enterprise meeting in Chinchilla on Thursday night.

http://www.miningaustralia.com.au/news/csg-projects-to-intensify-rental-pressure-report

Twenty-seven properties that are out of bounds for SMSF purchase financing

Self-managed super fund purchases are still quite a new frontier in the realm of property buying.

The shyness for many investors on entering financial markets has helped create this trend.

However, it has a few more challenges than conventional property buying, such as the level of deposit required and the type of property you are allowed to acquire.

We’ve found a list of unacceptable properties that will stop a bank or lending institution providing credit for a self-managed super fund property purchase:

• Units or apartments with less than 45 square metres of living area

• Converted Hotels or motels

• Churches or places of worship (converted or otherwise)

• Residential property with a commercial content or used for a commercial purpose

• Commercial or industrial property

• Relocatable homes

• Leasehold other than Crown Leasehold

• Any property in excess of 50% per borrower in any one completed development that has a maximum of 8 properties in the development (duplexes are acceptable), or any property in excess of 4 per borrower in any one completed development where there are more than 8 properties in the development.

• Boarding houses or hostels

• Brothels

• Specialised student accommodation

• Any property subject to a rental guarantee (display homes and state and federal government properties are acceptable however)

• Any property that is subject to a ‘two tier’ market

• Home units attached to management rights of the complex

• Any property located in a flood zone greater than 1:100 year frequency

• Any property located on a contaminated site, or land holding greater than 40 hectares (100 acres)

• Any property that is used for the purpose of farming

• Specialised or unique dwellings

• ‘Over 55?s dwellings

• Property with a capital value less than $60,000 (land and improvements)

• Any property that will require developments of more than two dwellings on it

• Boundary of property located within 50 metres of high voltage transmission lines

• Properties with partly finished construction work

• Serviced apartments

• Studio apartments or bedsitters

• Any property located on a island that is not accessible by road

• Any property with a ‘lease for life’ covenant on the title

SMSF purchasers should seek advice before committing to a property contract, as the rules are tight.

As always, do your homework!

By Paul Osborne
Tuesday, 07 May 2013

http://www.propertyobserver.com.au/self-managed-super-funds/twenty-seven-properties-that-are-out-of-bounds-for-smsf-purchase-financing-paul-osborne

 

Affordable units to house non-mine workers

BHP-Billiton Mitsubishi Alliance (BMA) says new affordable housing properties in central Queensland will be used to lure non-mining workers to the region.

The company, along with the Isaac Regional Council, has built 16 units in Moranbah and Dysart, south-west of Mackay, for low to medium income earners.

BMA asset president Steve Dumble says given the amount of projects his company has in central Queensland, it needs to ensure the local infrastructure can support the demand for large-scale mining.

“We’ve invested a significant amount of money – $100 million over the last two years in a range of community infrastructure,” he said.

“We’re investing on a number of fronts in spite of the tough economic circumstances at the moment because we have a lot at stake.

“We want to make these towns and central Queensland attractive places to work.”

He says the new units will be available for people not working in the mining industry.

“People who are needed to run day care, to perform emergency services functions, to work in the medical area,” he said.

“Those sort of critical functions that towns like Dysart and Moranbah can’t do without.”

Isaac Mayor Anne Baker says council will now look to secure more corporate funding for further housing developments.

“It’s a moving beast – affordable land and accommodation will always be high on our agenda,” she said.

“We’ll be actively seeking other industry partners to come on board with us and contribute.”

She says the council has made a significant contribution to the project.

“Council’s contribution with this housing project was the land, which is valued at $1.36 million and we also had a further investment of land and feed capital funding of $6.7 million,” she said.

“It’s been a large chunk of money and revenue from council that’s gone into the project but that has been coupled and assisted by BMA.”

http://www.abc.net.au/news/2013-05-07/affordable-units-to-house-non-mine-workers/4674010?section=qld

Fortescue and Rio plot Pilbara expansion

Rio Tinto and Fortescue Metals Group are confident they will keep growing their Pilbara iron ore operations despite a concerted push by many investors for more cash to be returned.

Rio chief executive Sam Walsh told an analyst briefing in Sydney that the miner’s board was likely to approve $US4.3?billion of spending on iron ore mine expansions needed to take capacity to 360?million tonnes by 2015.

And at the opening of Fortescue’s Firetail mine in the Pilbara, chief executive Nev Power outlined plans to boost production by a further 10?per cent to 170?million tonnes at a minimal cost after it completes a $US9?billion expansion plan by the end of this year.

Both mining companies indicated they are well aware that investors are seeking higher dividends and share buybacks, particularly after Woodside Petroleum issued a special dividend and raised its payout ratio last month.

But Fortescue chairman Andrew Forrest said the miner could be “both a yield and a capital growth company. It doesn’t have to be one or the other.”

Fortescue disappointed investors in February when it held back on paying an interim dividend despite paying one six months earlier. But it unveiled plans to move to a fixed payout ratio of 30 to 40?per cent in the future.

Mr Forrest, who owns 33?per cent of the miner he founded, said Fortescue would resume dividends as soon as it was “responsible” to do so.

‘Best project in the Rio portfolio’

Mr Walsh admitted to analysts that in recent investor meetings, some fund managers had questioned whether Rio should proceed with its iron ore expansion or return the cash to shareholders. Rio has been looking to sell non-core assets and clamp down on costs in an effort to maintain a single-A credit rating currently on negative watch.

But analysts that attended the briefing said it appeared the expansion was likely to be approved by the board in the fourth quarter despite some recent market speculation it could be delayed.

“The message was, barring a black swan event in North Korea, the project is likely to go ahead,” JPMorgan analyst Lyndon Fagan said. “It was confirmed as the best project in the [Rio] portfolio. We would be surprised if they cancelled that project despite the noise around.”

However, another analyst said his view was that delaying the project would be a “really good signal” to the market about capital discipline. Rio has already approved the necessary infrastructure spending and will lift its production capacity from 290?million tonnes by the third quarter of this year.

Mr Walsh and new chief financial officer Chris Lynch met with analysts on Monday and were joined by Rio chairman Jan du Plessis at an earlier investor meeting. It is the first round of in-person briefings Mr Walsh has done in Australia since taking on the top job in January. The miner’s annual meeting is in Sydney on Thursday.

On to the next phase

At the Firetail mine opening, Mr Power indicated the company’s expansion to 155?million tonnes of annual production would mark the end of the company’s major construction phase.

He foreshadowed that would be followed by an “efficiency” phase that could lift production by a further 5?per cent to 10?per cent. “We see the next phase beyond 155?[million tonnes per annum] as optimising, de-bottlenecking and increasing the productivity of the assets that we have,” Mr Power said. “The quality of these assets is fantastic. There is a lot of incremental volume that can be put through these facilities with no additional capex.”

Fortescue is expected to approve construction of a $US250?million fifth berth at Port Hedland in the 2014 financial year to boost its port capacity to around 180?million tonnes.

http://www.afr.com/p/business/resources/mining/iron_ore/fortescue_and_rio_plot_pilbara_expansion_maf7798VCi37xs9hHptagN