LNG's move to structural surplus mirrors iron ore and coal

Is liquefied natural gas (LNG) the next iron ore or coal, destined for an extended period of weak prices amid a shift from market deficit to structural oversupply?

Asian LNG prices seem to have already weakened and not just because of lower seasonal demand amid a warmer-than-usual northern winter.

Spot prices have recovered slightly recently, trading at US$7.70 per million British thermal units (mmBtu) last week, up from the record low of US$6.70 reached last month. But even this slight recovery leaves Asian LNG prices at levels not seen since 2010 and well below the peak of US$20.50 per mmBtu reached in February 2014.

LNG's seasonal pattern is for prices to rise from the third quarter through to the start of the first quarter as demand increases during winter. Then they decline until another rally from around the end of the first quarter to the second quarter ahead of summer demand. But this pattern didn't materialise at all in 2014.

There was only a tiny upward blip in December interrupting a relentless decline in prices, with LNG losing 54 per cent from its February peak to the November low. It's true that LNG was driven lower by a similar collapse in crude oil prices as well as the warmer winter, but these factors are unable to explain all of the decline. What has changed in LNG is the wave of new supply, and this is likely to become more pronounced in the next few years.

In 2014, Exxon Mobil started up its 6.9 million tonne a year project in Papua New Guinea and first cargoes were shipped from Queensland Curtis, the first of seven Australian ventures under construction to move to production. The 7.4 million tonne a year Curtis project only started shipping late last year, so the main new supply in 2014 was the Exxon Mobil plant in PNG.

If the addition of just 6.9 million tonnes a year can drive LNG prices substantially weaker in Asia, it's not difficult to imagine the impact of another 62 million tonnes per annum from just Australia by 2018.