Articles in Category: Public Policy

In light of more than 20 states finally being able to lodge formal lawsuits against the EPA’s Clean Power Plan a month ago, the National Mining Association has commissioned Energy Ventures Analysis (EVA) to drill down into the costs of complying with the rule — for industrial users, commercial user and consumers alike.

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From a high level, EVA expects a “$214 billion increase in wholesale electricity prices, double-digit wholesale electricity price increases in 46 states, and $64 billion to replace lost power capacity serving 24 million homes.”

EPA Clean Power Plan Cost in Pictures

In a visual nutshell, here is what EVA projects the costs of the EPA Clean Power Plan to look like:

Source: Energy Ventures Analysis

Clearly, many of the hardest-to-be-hit states are also the most manufacturing-intensive. Source: Energy Ventures Analysis

US map of electricity prices under EPA CPP

Ouch for the Rust Belt. Source: Energy Ventures Analysis

US map compliance costs power capacity replacement

Source: Energy Ventures Analysis

What This Means for Industrial Manufacturers

According to EVA:

“The consequences for costs are evident in the looming price increases for electricity. EVA’s analysis projects that by 2030, when the CPP is fully implemented, the wholesale price for electricity will spike electricity prices nationwide by 21.2 percent above the non-CPP base case.

Commercial and industrial consumers of electricity will naturally experience the same price increases, which are likely to be passed on to consumers in increased prices for goods and services. Furthermore, the greater natural gas demand by the power sector will increase natural gas prices that will be felt beyond the power sector. Residential, commercial and industrial natural gas consumers’ bills would increase by $6-8 billion/year under the EPA Clean Power Plan to recover higher gas commodity purchase prices. In addition, if the industry requires additional investment in pipeline capacity to meet the power sector’s growing gas demand, these costs would also be passed onto consumers.”

Read the complete report for more context, analysis and, most importantly, EVA’s methodology.

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We wrote recently about the probability that coal assets would become increasingly uneconomic if climate change related legislation such as emission caps and carbon taxes heaped costs on the industry that have, so far, been avoided.

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Well, an article in the Financial Times gives a glimpse of the future as envisaged by Amber Rudd, the UK government’s energy secretary. Speaking to the BBC hours before a speech on UK energy policy, Ms. Rudd announced a major review of the subsidies the UK pays for electricity produced from natural gas in an effort to encourage the replacement of the UK’s coal-fired power stations with combined-cycle, gas-powered technology ostensibly with a view to reduce carbon emissions

Coal vs. Natural Gas

Rudd would say later in her speech that she wants all coal power stations to shut down by 2025. The UK currently produces 21% of its electricity from coal-burning power stations, but those stations produce some 75% of the electricity industry’s CO2 emissions. However, a third of these power stations are expected to close by 2016, so that they meet EU air quality legislation.

Coal cars may not be lining up in the UK soon. Source: Adobe Stock/Carolyn Franks

Coal cars may be a thing of the past in the UK soon. Source: Adobe Stock/Carolyn Franks.

Coal creates roughly twice as much carbon dioxide as gas when it is burned for power. According to another FT article this week, research presented by the American Petroleum Institute shows that in the 25 US states with the highest rate of carbon dioxide emissions from their power generation, switching completely out of coal-fired generation and into gas would more than meet their targets for reductions set under the EPA Clean Power Plan.

For once, where the UK leads the US may follow if the current administration can build a head of steam behind emission reductions following next month’s summit in Paris. We say “may” with caution though. The US coal lobby is infinitely more powerful than the UK coal mining industry and, with an export market dwindling fast, can expect to put up a fierce resistance to the suggestion coal-fired power generation should be abandoned en masse.

Auctions and Emissions

In the UK, Rudd at least recognizes it is not sufficient to heap emission limits on power generation and expect the industry to sort itself out, switching from coal to other options. A recent auction for peak power provision ended up set to hand hundreds of millions of pounds in subsidies to highly polluting diesel generators, which are cheap to build and can undercut the prices offered even by gas plants.

The auction process could be rebalanced to take emissions into account, but that would not, in itself, encourage the industry to invest in new gas plants. For that, the market needs a guaranteed price which only the government can provide, much as it did for a recent new nuclear power plant project. Investors just aren’t willing to make 25-30 year commitments in such a volatile wholesale electricity market as the UK.

No guesses who will end up paying the price of the governments drive to be the “greenest government” ever, as usually consumers will foot the bill for subsidies, but at least with natural gas they have plants capable of meeting base and intermittent peak load in a relatively less polluting manner and, unlike renewables, with total reliability of supply.

A quiet revolution is going on in India’s defense sector.

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It is set to give an impetus to steel, aluminum and composite materials demand in the country. Recently, US aircraft manufacturer Boeing Co. and India’s Tata Advanced Systems Ltd. (TASL) announced a joint venture to manufacture aerostructures for aircraft beginning with the reputed AH-64 Apache fighter helicopter.

AH-64 Apache

Make in India, in this case, means making Apache helicopters there thanks to a joint venture with Boeing. Source: Adobe Stock / VanderWolf Images

The joint venture, according to media reports, would also then compete for additional manufacturing work packages across Boeing platforms, both commercial and defense.

Burgeoning Private Defense Industry

Currently, as many as 14 Tata companies are providing support to India’s defense and aerospace sector. In addition to TASL. The list also includes Tata Advanced Materials, a company that has delivered composite panels for cabinets and auxiliary power unit door fairings for the P-8I long-range maritime surveillance and anti-submarine warfare aircraft.

Another company, TAL Manufacturing Solutions, has manufactured floor beams out of composite materials for the Boeing 787-9, and provided ground support equipment for the C-17 Globemaster III strategic airlifter. Read more

Last week, we here at the MetalMiner Week in Review told you about how BHP Billiton CEO Andrew Mackenzie immediately went to Brazil to, essentially, say “I’m sorry” about the Samarco iron ore mine disaster that has left 11 dead and more missing.

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BHP Chairman Jac Nasser has since doubled down and said the company has already committed $363 million to rebuild following the tragedy. The “deeply sorry” strategy shows that BHP is not only committed to rebuilding, but wants to make amends for the damage its failed dam has caused and wants to continue to be a part of iron ore mining in Brazil. Read more

More evidence pointed toward a December hike in interest rates and the Senate bought congress more time to work out the details of a long-term highway/transit funding bill.

Fed Rate Hike Highly Expected

Data showed fewer Americans filed for unemployment benefits last week, further supporting the view that the Federal Reserve will raise interest rates in December after seven years near zero.

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Commodity markets should brace for another sell-off and lower prices if, as is widely expected, the Fed tightens policy in December and the dollar strengthens further. One reason is production, much of it in non-dollar countries such as Chile and Russia, where a higher dollar means rising revenues in pesos and rubles, respectively. It also means lower wage costs, paid in local currencies, allowing non-US producers to cope with falling prices.

Highway Trust Fund Extended Two Weeks

As the House and Senate continue to iron out differences on a multiyear highway bill, the Senate gave negotiators breathing room by extending the fund that pays for federal highway projects. The Highway Trust Fund would have lapsed today but now will last through Dec. 4.

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The chambers differ over funding levels for the highway bill, with the House proposing a status quo $325 billion bill and the Senate supporting an increase with an estimated $355 billion.

Part of the reason China’s economy has slowed is as a result of deliberate policy actions taken by Beijing to steer it from investment-led, export-orientated manufacturing toward a model based much more on domestic consumption.

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The result has not been great for resource companies or economies around the world, but it will, in the long run, be a more sustainable model for China, and indeed for the world. China’s super-cycle was unsustainable in the medium- to longer-term, the sooner it was curtailed the lower the long-term fallout was likely to be.

But there is another reason investment growth has slowed, not just in China but in virtually all emerging markets and that is because the US and other mature economies have on the whole reined in quantitative easing.

An article in the Financial Times states that as the Federal Reserve has purchased US treasuries, driving up bond prices and driving down yields, banks and pension funds have taken low-cost loans from recipients of those treasury sales — the banks — and invested them in higher-yielding assets, mostly corporate emerging market debt.

Emerging Markets

By some measures, the article says $7 trillion of quantitative easing dollars have flowed into emerging markets since the Fed began buying bonds in 2008, and that is before adding in QE from the UK, Japan and, more latterly, the European Central Bank. The FT quotes Andrew Hunt of Andrew Hunt Economics when it seeks to explain where those funds have gone and the impact all that loose money has had on emerging market debt levels, and I quote in part as follows.

Source: Financial Times

Source: Financial Times

How QE Money Gets To Emerging Markets

There are two main routes by which QE money reached emerging markets. One involved the Fed buying US treasury bonds, as outlined above, which results in savers going in search of higher yields — such as in mutual funds buying corporate and emerging market debt. Read more

This week started with the horrible Samarco mine disaster in Brazil. Two mine dams burst and waste from tailings ponds created to service the iron ore mine flooded local villages and affected water supply within a 60-plus-mile area. The death toll has now reached eight people.

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My colleague, Stuart Burns, warned that the co-owners of the mine, BHP Billiton and Vale SA, could be in deeper water than anyone. Remember BP after the oil spill?

BHP CEO Andrew Mackenzie hopped the first flight to Brazil to put as best a face as he can on the response. Yet the Brazilian government has already set its sights on Vale and BHP as the responsible parties and literal owners of the disaster.

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Source: US Energy Information Administration depiction of Federal Highway Administration data.

Earlier this year, the federal Highway Trust Fund (HTF) reached its lowest level in decades, ending July at $6.1 billion dollars. A congressionally approved transfer of more than $8 billion boosted the fund’s balance to end the fiscal year (September 30) at $12 billion, but that is still the second-lowest year-end level since 1984. As we speak, the House and Senate are working on a six-year funding extension for it. The fund pays for all federal highway projects and another (mass transit above) pays for all federal mass transit projects. Both are suffering as the gas tax that funds them has not been raised since 1993 and most cars are much more fuel efficient these days.

Purchasing Managers’ Indexes are suddenly up and Brazil has levied fines of $66 million against the operators of a mine whose dams failed last week.

PMIs Up, Good News for Commodities?

The recent uptick in PMI numbers in China and the developed world has led to optimism that a rebound in commodity demand and prices is just around the corner.

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This is largely based on previous experiences of rising PMIs being accompanied by stronger consumption of natural resources, and both data evidence and logic support the historical argument.

Brazil Fines Samarco Mine Operators

Brazil’s president slapped preliminary fines of 250 million reals ($66.2 million) against a mine in the country’s southeast where two dams burst, killing nine people and coating a two-state area with mud and mine waste.

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The fines, announced after President Dilma Rousseff flew over the affected area, come as federal prosecutors announced plans to work with state prosecutors to investigate possible crimes that could have contributed to the disaster at the mine, jointly owned by two of the world’s biggest mining companies, BHP Billiton Ltd. and Vale SA.

A report released recently concludes that treating China as a market economy in anti-dumping investigations would “severely damage the North American Free Trade Agreement (NAFTA) steel industries and harm NAFTA economies.”

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The study, composed of three economic analyses, was conducted by leading economists from Capital Trade Incorporated in Washington, DC;  the Centre for Spatial Economics in Ontario, Canada; and IMCO in Mexico City, Mexico.

Six steel industry groups — the American Iron and Steel Institute, the Steel Manufacturers Association, the Canadian Steel Producers Association, CANACERO, the Specialty Steel Industry of North America and the Committee on Pipe and Tube Imports — sponsored the report. They issued the following statement:

“China is a state-run economy and does not operate on market principles, yet it argues that it must be treated as a market economy as of the 15th anniversary of its accession to the WTO in December 2016. This third-party report found that granting China market economy status is premature and would lead to significant job losses in our sector, and in steel communities where plants are being idled and jobs are already being decimated. This is unacceptable.”

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