In recent years, Asia’s regional economy grew faster than any other region in the world. As China witnessed decades of double digit growth, and India’s economy made enormous strides, the region became more important in global energy markets. The surge in demand for commodities from emerging economies ensured that suppliers were able to charge stable prices. However, China’s economic miracle has ground to a halt, leading to a fall in its demand for liquefied natural gas (LNG), raising doubts about the future of LNG exports as well as placing downward pressure on energy prices.
Most recent figures show that the Chinese economy grew by 6.9% toward the end of 2015. While these figures are enviable for any other country recovering from the 2008 global recession, posting double digit growth rates has been one of the Communist party’s key economic policies since the early 90s. Perhaps more importantly, the country is currently undergoing an economic transformation to shift from an industrial based export economy to a consumer led services one.
By failing to heed the warnings - as far back as 2014, China’s economic planning agency (the National Development and Reform Commission) downgraded its forecast for future gas demand by 14% - suppliers were guilty of assuming that the good times were set to roll on, building up large supplies to keep feeding China’s insatiable energy demands. Such confidence has steadily eroded as Chinese demand for Australian LNG fell by 1.1%.
Though it may seem somewhat marginal, the fall marks the first time demand has declined in 10 years. The US had originally earmarked the Asia Pacific as a destination for its new found abundance of LNG, while Russia was also eyeing up Asian markets in an attempt to limit any damage its economy suffered from western-imposed sanctions. It remains to be seen whether the structural economic shift will generate the same demand for energy, but does mean overly optimistic forecasts should be treated with suspicion.
Elsewhere in the region, Japan’s LNG imports were recently reported to have fallen by 14% since 2009, which comes as a surprise following the Fukushima nuclear disaster raised major environmental and safety concerns. However, Japan’s ever declining population and stalling economy has been behind the fall in demand for LNG. The regions’ two economic powerhouses are heavily interdependent, stuttering growth in one, affects the other.
For example, sales in manufacturing equipment from Japan to China has fallen, subsequently affecting Japan’s export industry. When the two recover from the slump remains to be seen, but regional economic instability casts doubt on the so called ‘golden age’ of natural gas in the short term.
Despite an agreement between Saudi Arabia and Russia to cut oil production, energy prices in global markets have failed to rebound. Future price forecasts suggest that LNG sales will eventually pick up in the long term, but they must take account of the changing nature of the region’s economy.
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This article is a piece of independent writing by a member of Procurement Leaders’ content team.