Clyde Russell: LNG's Move to Structural Surplus Mirrors Iron Ore, Coal

LAUNCESTON, Australia, March 23 (Reuters) - 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 $7.70 per million British thermal units (mmBtu) last week, up from the record low of $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 $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 percent 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 Queensland Curtis project only started shipping late last year, so the main new supply in 2014 was the Exxon Mobil plant in Papua New Guinea.

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.

New Capacity to Swamp Demand - For Now

There are also another 48.5 million tonnes currently under construction in the United States, and these will also hit the market by 2018.

A further 41 million tonnes is under construction in three projects in Russia, also slated for start-up by 2018-19.

These are confirmed capacity additions, with the possibility of even more projects getting final approval in the United States, Canada and East Africa.

Even if these planned projects don't go ahead, there seems little doubt that the LNG market will struggle to absorb all the additional LNG that is already being built.

It's here that LNG starts to resemble iron ore and coal.

Both these commodities experienced fairly rapid increases in supply as miners were encouraged by high prices and strong demand growth in the period of global stimulus that followed the 2008 recession.

They also bought into predictions that Chinese demand would continue to rise strongly for decades as the world's most populous nation industrialised and urbanised.

While these processes are still happening in China, the prices of iron ore and coal have collapsed in recent years as capacity additions far outweighed even the most heroic of demand assumptions.

And even demand assumptions that were mainstream and on market consensus a few years ago have proven to be too optimistic as China slows its economic growth rate and tries to shift the composition of that growth from heavy (and polluting) industries to consumer spending and services.

This has led to a structural oversupply of both iron ore and coal, which is likely to persist for several years given the modest outlook for demand growth and the resilience of supply, even in the face of losses.

What is different for LNG is a stronger demand outlook over the longer term.

Unlike iron ore and coal, the Chinese authorities plan to boost the use of natural gas, whereas they want to lower the use of coal, and by extension iron ore, given the need for coal to turn the raw material into steel.

China's LNG imports rose 10.3 percent last year to 19.85 million tonnes, below some forecasts but still a reasonably strong outcome.

However, they are forecast to rise sharply in the coming years, with some estimates predicting China will consume more than 60 million tonnes of the super-chilled fuel by the end of next decade.

China plans to double its natural gas consumption to 400 billion cubic metres by 2020, and while some of this increase will be met from new pipelines from Russia and increasing domestic output, much will be sourced from LNG.

China has 37.1 million tonnes of re-gasification capacity and plans to add about 45 million tonnes more, so the country will have the ability to import more LNG.

Whether it does will largely depend on price, and it's here that the decline in LNG costs, if it is structural and sustained, will provide a boost to demand.

(Editing by Himani Sarkar)