Material Matters: Global LNG, Aussie Gas & Iron

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

Global LNG fundamentals are set to transform over the next few years; higher short-term gas prices domestically; and near-term support for the iron ore price.

-A potential reshaping of LNG market fundamentals?
-Global LNG supply may rise by 50% in the next decade
-ANZ Bank predicts higher near-term Australian gas prices
–Support for iron ore prices, but headwinds looming 

By Mark Woodruff

A potential reshaping of LNG market fundamentals?

A wave of new supply coming online in the global liquefied natural gas (LNG) market over the next several years, combined with the evolving dynamics of global demand, has the potential to reshape market fundamentals.

Broader implications arise compared to prior jumps in supply due to the increasing inter-linkages between regional gas markets following the Russia-Ukraine conflict, explains RBC Capital Markets.

This broker believes LNG demand is also set to rise, driven by both higher energy consumption in certain markets as well as broader decarbonisation initiatives. 

Regarding supply, RBC points to significant projects in the US and Qatar through 2030, alongside other expansions elsewhere.

Based on projects currently under construction and due to start-up in the coming years, global LNG supply is expected to increase by roughly 50% over the next decade.

After weighing substantial new capacity from these projects under construction, and potential contributions from unsanctioned projects, the broker foresees a surplus emerging towards the end of 2026, and continuing until 2030.

By 2030, RBC expects the US and Qatar will remain the biggest suppliers with a combined market share of nearly 50%.

On the demand front, Asia remains a crucial driver given the significant consumption expected from countries like China, South Korea, and India.

China’s demand for LNG is projected to rise steadily, notes RBC, driven by its energy transition strategy, which includes reducing coal dependency and expanding the use of natural gas in industrial sectors.

Similarly, India is poised to grow as a key LNG consumer due to its ongoing efforts to increase natural gas’s share in the country’s energy mix, both to meet rising energy demands and reduce carbon emissions.

Despite being further along in its energy transition, South Korea will likely maintain a steady demand for LNG, according to the broker, as part of its strategy to stabilise the country’s energy supply.

The only exception in the region will be Japan where reactor restarts will see nuclear regain market share it lost following the 2011 Fukushima disaster, explains RBC.

Together, Asia and Europe Asia and Europe account for between 88-93% of the global LNG market demand.

While Asia spearheads upcoming growth, Europe will likely experience stabilisation in LNG demand.

European countries have increased imports to reduce dependency on Russian gas, notes RBC, especially in light of geopolitical tensions affecting supply lines, such as the risk of Russian pipeline gas loss through Ukraine.

Although energy efficiency measures and renewable energy adoption are tempering Europe’s LNG demand growth, there is expected to be a transitional increase in LNG imports to replace declining domestic production.

RBC suggests this increase may create temporary tightness before the market eases as European renewable capacity and efficiency measures mature.

The LNG market will continue to experience elevated prices in the near-term, according to the broker, primarily due to current supply constraints and ongoing geopolitical risks, which have added a layer of volatility to global energy markets.

By contrast, as new projects reach completion, the market will eventually experience a rebalancing phase around 2026, which the analysts suggest could lead to a stabilisation or even a decline in LNG prices as supply overtakes demand growth.

The Dutch Title Transfer Facility (TTF) Natural Gas Futures contracts for 2026 has jumped by 30% since its nadir in February and currently sits at around US$11/mmbtu, which RBC considers overpriced given the outlook for market fundamentals.

The broker sees scope for prices to move below double digits as new capacity comes online.

RBC also highlights a shift in contracting practices within the LNG market.

Recent price volatility has driven a preference among Asian buyers for long-term contracts to secure stable and reliable LNG supply, explains the broker, particularly in Japan, South Korea, and China.

These contracts provide a hedge against price spikes and supply disruptions, offering greater predictability for both suppliers and consumers in a market known for its cyclical volatility.

ANZ Bank predicts higher near-term Australian gas prices

ANZ Bank commodity strategists forecast upward pressure on domestic gas prices in the coming months, as market tightness is expected to intensify with increasing volumes redirected to the international market, despite policy measures aimed at supporting domestic supply.

Failing to meet inventory targets could lead to limited buffers against unexpected production drops or demand surges.

East coast gas storage levels have recently hit record lows, with overall gas demand rising by 5% year-on-year in the third quarter of 2024, despite coal seam gas production reaching new highs, explains ANZ.

Refilling these storage facilities may be challenging, notes the bank, if warmer-than-average summer temperatures drive up demand and strong international demand persists.

ANZ suggests LNG producers in Queensland are crucial to rebuilding east coast gas inventories, yet strong demand and favourable international prices may divert supplies from the domestic market.

Taking advantage of higher prices, exports to the spot market now account for nearly 30% of total domestic production, with global geopolitical tensions limiting supply at key choke points, explains the bank.

LNG demand across Asia has reached new highs, while Europe has become increasingly dependent on international LNG as Russian gas flows via Ukraine are expected to cease next year, following Kyiv’s indication it will not renew its agreement with Gazprom.

One factor offsetting upward pressure on gas prices could be the performance of rooftop solar power generation.

ANZ Bank explains a hot summer would likely boost output from this sector, reducing the operational demand for gas-fired electricity generation.

Support for iron ore prices, but headwinds looming 

Citi expects near-term steel exports and production in China to remain elevated, likely pressuring regional steel prices while supporting iron ore prices. Additional price support may come from potential large-scale stimulus efforts by the Chinese government.

While Chinese steel consumption is down around -25% from its peak level, steel production remains elevated with steel exports the balancing factor, explains the broker.

Whether China adjusts steel production rates to match its lower consumption levels is still unclear to Citi.

The analysts remain bullish on iron ore pricing in the near-term, yet medium-term headwinds are apparent, which should lower iron ore prices over time.

Pricing challenges include potential China steel industry discipline, ongoing efforts by steel producers to reduce CO2 emissions, as well as increased iron ore supply of circa 200mpta in the next four years.

By way of background, the broker explains the big four iron ore miners –Rio Tinto ((RIO)), BHP Group ((BHP)), Vale and Fortescue ((FMG))– account for exports to China of around 1bn tonnes per annum (tpa), or 65% of requirements, whereas China’s domestic iron ore production runs at circa 1bntpa, but after adjustments for low quality is around 250mtpa of 62% Fe equivalent iron ore, according to the broker.

The analysts highlight iron ore generates around 60% earnings margins for the big four, with aggregate profitability nearly five times that of China’s steel industry.

Reportedly, the Chinese government is targeting further steel industry consolidation, aiming for the top five steel companies to control 40% of China’s steel market by next year (31% in 2023) with the top 10 accounting for 60%, up from 44% in 2023.

Consolidation will take time to take effect and reduce overcapacity/production, highlights Citi, while previously announced government stimulus won’t impact on steel production until the second half of 2025.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms