Articles in Category: Public Policy

There was a lot of talk last year about coal resources needing to be left in the ground if the world was to reach it’s 2-degree-celsius reduction environmental targets.

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The suggestion was that legislation was required to force power generators to switch to less polluting energy sources and, while in the meantime tougher emissions standards have played their part, the market has been much more active than government in encouraging change.

Could 2015 be the beginning of the end for coal-fired power in the US? Source: Adobe Stock/Snap Happy

Could 2015 be the beginning of the end for coal-fired power in the US? Source: Adobe Stock/Snap Happy.

A recent US Energy Information Administration report covered by Reuters states that generators produced 101.86 million megawatt hours (MWh) of electricity with gas in November versus just 87.78 million MWh with coal, the lowest monthly level since May 1980 when monthly coal use was 84.88 million MWh.

How Coal Lost Ground

After more than one hundred years during which coal was the dominant fuel for power generation, some analysts think that when the final data for December is in, 2015 will prove to be the year natural gas took over. Read more

Our Renewables MMI regained some of the ground it lost last year and climbed back up to 52 this month.

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However, renewables are still a market stuck in a low-price rut with little prospect of breaking out of the low range they’ve been settling into over the last four years. Seemingly paradoxically, renewable energy was the biggest source of new power added to U.S. electricity grids last year as falling prices and government incentives made wind and solar increasingly viable alternatives to fossil fuels.

Renewables Lead New Energy Capacity

Developers installed 16 gigawatts of clean energy in 2015, or 68% of all new capacity, Bloomberg New Energy Finance said in its Sustainable Energy in America Factbook released Thursday. U.S. clean-energy investments rose to $56 billion last year, up 7.5% from 2014. The majority, $30.2 billion, went to solar. Investors pumped $11.6 billion into wind energy and $11.1 billion into technology to improve grids, boost efficiency, develop storage systems and other ways to better manage power usage.

Renewables_Chart_February-2016_FNL

With so much investment in the technology, why such a gloomy outlook for the metal products, such as grain-oriented electrical steel and silicon, that go into them? Most are oversupplied and their individual markets have not yet hit bottom in this bearish commodities cycle. We’ve also often lamented that the recently extended tax credits for products that contain these metals actually help keep prices low and discourage any real price inflation based on value.

Low prices for both gasoline in cars and natural gas for electrical power generation will also discourage further adoption as those fossil fuels will look more attractive to investors.

Adoption Keeps Climbing

The good news is that with more adoption, green technologies are getting into the hands of more homeowners, in the case of solar, and more utilities in the case of wind. Some lesser-subsidized technologies such as biomass are also taking a bite out of the electrical power generation market where natural gas is now the dominant player.

Power from natural gas-fired plants accounted for 25% of capacity added to grids last year. Nearly one-third of all electricity in the U.S. is now generated by gas, putting it nearly on par with a declining provider, coal.

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The future is certainly bright for the metal inputs of wind turbines and solar panels. We just wouldn’t advise anyone to invest in these metals right now expecting a turnaround and an escalating market such as nickel’s 2014 climb. Slow, steady and subsidized will win this race.

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China vowed to cut its steel production over the next five years and the Trans-Pacific Partnership is now officially signed.

TPP Signed, Legislative Fights Ahead

Trade ministers for the 12 Trans-Pacific Partnership nations formally signed the massive accord on Wednesday in New Zealand and vowed to throw their weight behind surpassing the various legislative hurdles necessary to actually put the deal into place.

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The 12 nations account for some 40% of the world’s economy. They now have two years to ratify or reject the pact.

China Vows to Cut Steel Production

China will cut crude steel capacity by 100 million to 150 million metric tons within the next five years in a bid to tackle a crippling glut that has dragged prices down to multiyear lows and saddled firms with huge debts, the nation’s cabinet said recently.

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The State Council also said it would ban new steel projects and work to eliminate so-called stricken “zombie” mills, which have stopped producing steel but have not formally shut down.

We recently wrote about how the spending bill signed in December favors solar power with better and longer renewable energy tax credits than it gives to wind power. However, solar also did better in the extenders” bill than the one technology responsible for generating the most energy from renewables in the US today: biomass.

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The tax extenders package benefits biomass power with an extension of the Section 45 production tax credit (PTC). The PTC for technologies other than solar or wind has been extended for two years, through Dec. 31, 2016. The incentive amount for wind, geothermal, and “closed-loop” biomass — the kind that does not create carbon dioxide — is $0.023 per kilowatt hour. For other eligible technologies such as fuel biomass, municipal solid waste, landfill gas and others, the credit is $0.012 per kw/h.

Can sugar cane bagasse solve our clean electrical power generation problems? Source: Adobe Stock/ idmanjoe.

Can sugar cane bagasse solve our renewable electrical power generation problems? Source: Adobe Stock/ idmanjoe.

In contrast, the legislation allows solar power companies to keep claiming federal tax credits at 30% of the price of a solar array. The credits, which apply to home solar kits as well as big commercial installations, will be good through 2019. After that, though, the credit will begin to drop, declining to 10% in 2022. Credits through 2022 vs. $0.012 cents per kw/h for one year? Even wind did better than biomass with its $0.023 cents per kw/h and an extension of those credits through 2019.

What is Biomass?

Biomass is biological material derived from living, or recently living organisms. In the context of biomass for electrical power generation, this is often used to mean plant-based material, but biomass can equally apply to both animal- and vegetable-derived material. Woodburning stoves are a primitive form of biomass heating. Ethanol for cars also falls under the biomass category as “biofuel” but it’s not used for electrical power generation.

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With sanctions lifted Iran is joining the international community and steel supply and production deals are a big part of their entrance.

POSCO Buys Into Iranian Steel Mill

South Korea’s POSCO plans to sign a preliminary agreement with Iranian steelmaker PKP in March to buy a stake in a $1.6 billion steel mill project in the Middle Eastern country, a source with knowledge of the matter told Reuters.

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In September, the firms signed a memorandum of understanding to build the plant with an annual production capacity of 1.6 million metric tons in Iran’s Chabahar free economic zone and Reuters’ source says more business is on the way now that sanctions have been lifted.

Danieli Will Sign Iranian Steel Contracts

Italian steel firm Danieli will sign about $5.7 billion in commercial agreements with Iran during President Hassan Rouhani’s visit to Rome this week, a company spokesman confirmed on Monday.

A government source told Reuters earlier that the contracts were worth about $4 billion, but a company spokesman later said the total value of the agreements was higher and included a joint venture with other international investors, including Iranians.

The joint venture, worth $2 billion, will be called Persian Metallics, the Danieli spokesman said, giving Reuters further details.

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Danieli will directly sign contracts with several Iranian companies for machines and equipment to produce steel and aluminum for a total of $3.7 billion, the company said.

Rouhani arrived in the Italian capital on Monday morning and will leave for Paris today.

Today in MetalCrawler, major oil exporters Saudi Arabia and the Russian Federation talked about possible cuts in production to combat low, low prices caused by a worldwide glut. Final figures for 2015 showed that US construction had a great year.

Russia and Saudi Arabia Talk Oil

Senior OPEC and Russian oil industry officials had vague talks, Reuters reported, about possible joint action to remedy one of the worst supply gluts in decades, while Saudi Arabia signaled its resolve to allow the market to balance itself.

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The latest volley of comments highlighted the intensifying pressure of $30 a barrel oil prices on cash-strapped countries such as Russia, but did not appear to tilt the scales meaningfully towards any concerted action to reverse the price crash from the Saudis and their controlling bloc of votes in OPEC. The Saudis are said to have asked for more “cooperation” on any future production cuts.

US Construction Starts Up in 2015

Dodge Data and Analytics reported that, for the full year of 2015, residential construction was up 14% to $265.4 billion, beating 2014’s increase by 4%, and non-building (mostly civil projects such as utility work) rose an impressive 23% to $176 billion, bouncing back from last year’s 8% decline.

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By contrast, non-residential construction fell 8% to $204.2 billion, giving back some of the 2014 increase of 24% but still 14% higher than 2013.

The Flash PMI increased in January and the Federal Energy Regulatory Commission got a win at the Supreme Court.

Flash PMI Up

The Markit Flash manufacturing purchasing managers’ index showed that sentiment rebounded in January after hitting a 38-month low in December, according to data released Friday. The Flash PMI rose to a reading of 52.7 from 51.2 in December.

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Output and orders picked up in January after slowing late last year. But job creation fell to a four-month low and manufacturers cut inventories. The flash estimate is typically based on approximately 85%-90% of total PMI survey responses each month.

Supreme Court Revives FERC Power Demand Rule

The Supreme Court on Monday resurrected the Federal Energy Regulatory Commission‘s rule that consumers be paid for using less power during high-demand periods, overturning a D.C. Circuit ruling that said the rule usurps state authority over retail electricity markets.

By a 6-2 vote, the high court held FERC reasonably concluded that it had authority under the Federal Power Act to issue its so-called demand-response rule. Justice Samuel Alito had recused himself from the case.

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Demand response directly affects wholesale electricity rates, and FERC is not directly regulating retail electricity sales with the rule, the majority held.

An appeals court will allow the EPA Clean Power Plan to stay in effect while it is argued in court and China’s plans to tame its largely state-run metals producers are starting to become more clear.

Clean Power Plan Will Stay in Effect

The Washington D.C. Circuit on Thursday refused to put the Environmental Protection Agency Clean Power Plan on hold until legal challenges to the rule are completed, but they did fast-track a trial on the legality of the new rule.

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The Obama administration considers this an early victory as it looks to defend and implement the sweeping regulations that would slash carbon emissions from existing power plants.

29 States and several industry groups petitioned to overturn the CPP or, at the very least, block it from being implemented while the legal battle plays out. They’ve argued that they’ll be irreparably harmed by starting the compliance process, even though they’re likely to succeed in convincing the court that the rule is illegal.

However, the D.C. Circuit panel shot the request down in a two-page order, though it said the appeals court would expedite the consideration of the case and schedule oral arguments for June 2.

China’s Metals Transition Plan

China’s plans to set up funds to manage coal and steel capacity closures and stockpiling schemes for metals such as aluminum have offered nervous markets some clarity on the likely future make-up of the country’s sprawling and predominantly state-run metals and mining industries. But it’s still way too early to tell if these initiatives even can be successful in taming overproduction.

As the world’s largest producer of aluminum, steel and other metals, and the biggest consumer of copper and iron ore, China is crucial to global metals markets which have slumped in the past year as Chinese industrial demand growth slowed.

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After weeks of talks between government officials and leading metals producers, Beijing looks set to take a direct approach to managing capacity cuts and layoffs in coal and steel. It will provide smaller-scale financing deals to groups of producers of non-ferrous metals, such as aluminum, for stockpiling and capacity cutback initiatives.

After its surprise devaluation last August, a number of daily fixes in the Chinese yuan’s exchange rate have followed.

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As its economy slows down, China is trying everything it can to encourage growth such as weakening its currency to make goods more attractive abroad while accelerating import substitution at home. The proverbial kitchen sink has been thrown at the growth problem in China.

However, while China pursues its domestic goal, the country is also worsening the financial stability of other countries.

Yuan-dollar exchange rate 1 year out

Yuan-dollar exchange rate one year out. Source: Yahoo Finance.

As we pointed out back in August, a weaker yuan is bearish for industrial metal prices. Here are four reasons why:

It Encourages Chinese Exports, Expanding a Global Glut of Cheap Imports

When the value of the yuan falls, metals produced  in China become cheaper and more competitive in global markets. This helps to prop up exports of metals such as steel and aluminum products, potentially hurting prices around the globe. Read more

As our editor said last week, the road to hell is paved with good intentions, an apt phrase for the events unfolding in China this week.

Regulators were obliged last year to relax tight controls over the currency in order to qualify for Reserve Currency status from the International Monetary Fund for the yuan/renminbi but had probably not foreseen the consequences. Indeed, many are still not seeing the collapse of share prices on the Shanghai Stock Exchange this week as a currency-related issue.

If You’re an Investor, It’s Your Money Getting Purposely Devalued

Anyone holding shares or a pension will be painfully aware that some $2.5 trillion has been wiped off the value of global equities this week, in just four days, events starting in China have rippled around the world causing one of the worst starts to the year for stock markets since the 1980’s.

On the Shanghai market, trading was stopped on Monday as “circuit breakers” closed the market after shares plunged 5% and, again, Thursday trading was canceled for the day after just 29 minutes when the CSI300 fell more than 7%.

Under the “circuit breaker” system, created after the plunge in shares last August, if an index rose or fell 5%, trading was halted for 15 minutes. If it dropped by 7%, trading stopped for the rest of the day.

So what prompted the sell-off? Many have been saying the Shanghai market is a bubble waiting to burst for quite some time, but is it a sudden epiphany among investors that prices are overvalued? No. Actually, it has little to do with share prices and a lot more to do with currency and ill-judged rules imposed by Beijing to try to control the market, Beijing’s actions often have unforeseen consequences in such situations.

What is the Real Value of a Controlled Currency?

First, the currency: as we mentioned above Beijing allowed the yuan to respond more readily to market forces. We won’t say float, but the trading bands were widened and the currency has fallen for much of 2015 against the rising dollar. This got investors worried, even if the Shanghai market was not shaky, a falling currency makes shares less valuable over time.

Further, holders of yuan,companies and investors made up of China’s rising middle and wealthier classes, see the cost of foreign investments such as houses, land, companies, rising almost daily in yuan terms.

Valuation of the yuan moved to a basket of currencies last year rather than a loose peg against the dollar with the promise by Beijing that it would remain more stable against the China Foreign Exchange Trade System basket. That was December, since then the currency has slid for three straight weeks and the central bank has burned through $140 billion trying to defend it.

Falling Production Data Adds to the Misery

Combine that with a fall in China’s Purchasing Managers’ Index composite for both manufacturing and services to below 50 and frightened investors took flight, dumping shares in a repeat of what we saw last August after Beijing’s snap devaluation of the yuan as this graph from the New York Times illustrates.

Yuan_USD_ Stockmarket

Source: The New York Times

In an attempt to calm the panic selling, Beijing has actually made matters worse. The end of a share sale ban, that was imposed last year wherein investors were prohibited from selling for a lock-in period, was extended. Believing they were going to continue to be locked in to shares that were falling in value and, naturally, becoming spooked by company insiders selling shares, investors rushed for the exits. Beijing then had to move fast to extend the ban into 2016, which has helped calm markets temporarily but done nothing the address the underlying causes.

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