SYDNEY -- Against a backdrop of sinking commodity prices, low inflation and central bank rate cuts, the direction of the Australian economy looks uncertain. Former Australian Minister for Trade and Competitiveness Craig Emerson spoke to The Nikkei about the path ahead for the resource-rich economy now that the mining bonanza has faded.
Q: How are sinking oil prices impacting Australia?
A: Australia is a major exporter of energy, and that includes coal, but also increasingly LNG (liquefied natural gas). To the extent that LNG prices are linked to oil prices being revised downward and [therefore] the prospects for our LNG exporters being revised downward, we are unlikely to achieve the export figures that you would expect.
Q: There are seven major projects underway that will make Australia the world's largest exporter of LNG when they are completed in 2018. Is LNG Australia's next big commodity export?
A: Yes, but it could be a bumpy road. Massive LNG investments are about to yield greater production. However, just as the world didn't foresee the sharp reduction in oil prices, noone can say with confidence what the oil price will be in three to four years. We're also seeing cutbacks in investment in projects.
Q: What are the prospects for Australian LNG exports to Asia?
A: One of the big considerations will be what happens in the U.S. with its energy policy. With the oil price falling, the U.S. activity in shale gas will be lower in the shorter term than otherwise expected. In the longer term, the U.S. may increasingly allow exports of LNG, which would put more competitive pressure into the East Asian markets. The East Asian price of LNG is quite high relative to many other regions, and so it's quite an attractive market for the big producers. The price of export gas from the U.S. and Australia will tend to equalize after taking account of the different transport costs.
China is reducing its reliance on coal, so there will be reasons why China would want to use more gas in electricity generation. If there is a binding international agreement on climate change, that, too, will affect price movements.
Q: Iron ore prices are also plunging. What would you prescribe for the Australian economy?
A: The four big industries where Australia can turn to are agribusiness, tourism, education and also LNG. They could well and truly fill the hole that is created by the end of the mining boom, plus some. However, the investment needed to do that has not been forthcoming at this stage. One of the reasons is that the Australian dollar has been very high until very recently. But the depreciation still has a way to go.
Improved market access [created through the recent free trade agreements with China, Japan and South Korea] is always radical for an open trading country [like Australia]. The door might be open, but if you can't compete with others, you're not going to walk through the door. If you're in an industry -- for example, electricity transmission -- and it's protected from competition, then you're going to get low productivity; that's what we've got. It's human nature. [So] we need competition and investment in creative talent.
Interviewed by Nikkei staff writer Kaori Takahashi