Bad News for Japan, Good News for Aussie LNG Producers

Another week, another resource company takes one on the chin. Uranium miner Paladin Energy came out and told the market it’s going to slash jobs and costs anywhere and everywhere. It needs to hold the fort while it waits for the uranium market to turn around. When that turn is coming is the question. The spot price for old ‘yellowcake’ is a dismal US$35 per pound.

We remember reading that natural resource veteran Rick Rule bought Paladin Energy for 10 cents a share and later sold them for near $10. Such can be the giddy return of speculative mining shares. But those days of glory must seem like a lifetime ago for the company.

The way the share price is going Mr Rule might be able to buy it back at 10 cents. Maybe he will. He likes buying when others are selling. Currently it’s trading at 49 cents, the lowest price since 2004. Perhaps we can ask Rule when he’s in Melbourne later this month for an exclusive talk with Diggers and Drillers subscribers. He’s on the record saying that the uranium price must rise and will take the right stocks with it.

Mind you, he’s always sharp to point out that, after twenty years in resources, just because something is inevitable does not mean it’s imminent. We’re learning that too.

We wonder what the Japanese government makes of it. Currently the country is without nuclear power for only the third time since 1970, according to Reuters. All 50 reactors are offline. As we’ve noted previously, Japan is covering the energy shortfall with expensive LNG imports. That’s causing it to run monthly trade deficits. It’s also cranking up the costs on local business and consumers that sorely need a lucky break.

Japanese Prime Minister Shinzo Abe is known to favour nuclear power. You’d think a dirt cheap uranium price must look like a pretty compelling way to try and get the country’s costs under control. For the moment though, all Japan has is his latest plan to raise the consumption tax from 5% to 8% next year.

Raising the tax is predicted to hurt the Japanese economy, so Abe is going to give most of the revenue back in the first year through stimulus spending. Politicians, eh?

Abe’s not going to get much help from the LNG market in the short term, if the latest gas market report from the Bureau of Resources and Energy Economics (BREE) is right. Japan and South Korea buy about half of global LNG production as it stands today, and prices should stay reasonably high.

Here’s how the BREE sees it: ‘Massive investments in gas field extraction, processing and delivery will enable LNG exporters, including Australia, to capture an increasing share of the global gas trade out to 2020. Over the short term there will be limited opportunity to increase gas supplies, at least via LNG, until LNG facilities currently under construction become operational from 2015 onwards. The current supply bottleneck for LNG is likely to result in continued higher natural gas prices over the short run in markets dependent on LNG as a feedstock, especially in Asia.’

Bad news for Japan, good news for Aussie LNG producers. That’ll help national income, especially with coal prices off the boil. But we ended last week looking further out and wondering if the next generation of LNG projects will get the go ahead. If they don’t, the industries associated with construction and development will be in for a tough time. The BREE report dodges a definitive answer, as far as we can tell. The outlook stays murky because so much depends on what happens in North America. That’s where Asian buyers are looking to source supplies cheaper than Aussie LNG. Watch this space.


Outlook for Australia’s LNG Production Capacity

click to enlarge
Source: BREE Gas Report

What happens in North America is not just crucial for deciding who sells LNG to Asia, it’s also crucial for oil. Greg Canavan over at Sound Money Sound Investments traced the oil market all the way back to the beginning of the petro-dollar standard in his latest issue to nut out the likely implications for investors. One of those is the future of the US dollar-based financial system.

Energy stocks will go on his buy list at some point. But like all value investors, he wants his margin of safety first. ‘If I’m right about the coming correction we’ll get the opportunity to buy a few quality energy companies at much better prices than are on offer now.’

We wonder what Rick Rule makes of it all. We’ll find out soon enough. Stay tuned.

Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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