Just How Big Will Australia’s LNG Export Boom be?

Morgan Stanley just came out with a cracker. It reckons Australia could become a global gas superpower in a few years’ time, with LNG exports set to generate a current account surplus for the first time in 40 years.

We don’t doubt that LNG exports are set to increase massively in the years ahead. But to claim it will turn around a 40 year deficit smacks of a PR piece.

Firstly, consider that in 2012/13 Australia’s current account deficit was $54.9 billion, largely consisting of a $17.85 billion trade deficit and a $34.9 billion net income deficit. That’s with an iron ore price and volume boom.

So let’s be generous and say that the LNG export boom will bring us a trade surplus. We say it’s generous because it’s something the iron ore boom, despite all the hype, has been unable to provide.

Then you’ve still got a $35 billion income deficit to deal with. That’s the interest and dividends payed out after netting Australia’s assets abroad against foreigners’ assets here.

Foreigners have $854 billion in net assets in Australia (meaning Australia has a net foreign debt position of $854 billion) which means we have to pay dividends and interest on that capital each year. In 2012/13, the cost of borrowing this much money (thanks, housing boom) was nearly $35 billion.

While LNG exports might be massive in the coming years, you have to keep in mind that not all of the capital expenditure to build the infrastructure came from local investment. Foreign capital contributed too. So to the extent that these projects generate decent returns on capital (an uncertain prospect given the cost blowouts now occurring) some of those returns will flow out of the country, contributing to a current account deficit.

The reality is that if Australia does get back to a current account surplus, it will be a painful adjustment. That’s because a current account surplus signifies living within ones means. That’s something Australia hasn’t done in decades.

While LNG exports will no doubt assist in that adjustment, falling imports (from lower consumption?) will play the major part.

So is Morgan Stanley predicting an export boom and an import bust? We don’t know. But that’s about the only realistic way Australia is ever going to move into a structural current account surplus.

If that’s the case, you might want to have an investment strategy to prepare for the bust.

Tomorrow, we’ll look at another important piece of the pie for Australia, and explain why government deficits will be a feature of the economic landscape for years to come.

It’s really astounding to think about how badly our politicians have blown the boom. It’s a national disgrace, with no one held accountable. We’ll try to rectify that somewhat tomorrow.

Regards,

Greg Canavan+
for The Markets and Money Australia

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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