The value of the euro fell to its lowest level in years this week, hitting $1.19 a 15% fall from May and the lowest level since 2005, In response European stocks fell sharply amid uneasiness about whether the region is on the verge of a new economic and financial crisis.
Source: NY Times.
Stock markets were already under pressure from falling oil stocks as Brent crude hit a 5-year low, interpreted by many as a sign that global demand has collapsed resulting in a glut of oil driving prices down. The markets are betting on the European Central Bank (ECB) introducing sovereign and corporate debt purchases at their next meeting on January 22, a form of “Quantitative Easing.”
Indeed, in the New York Times Jean Pisani-Ferry, an economist who serves as a policy adviser to the French government, is quoted as saying the markets have already priced in the introduction of QE and if the ECB fail to act, the consequences could be dire.
“Disappointing those expectations would bring an abrupt and damaging unwinding of positions: Long-term interest rates would rise, stock markets would sink, and the exchange rate would appreciate,” he wrote.
When we think of countries rich in energy production we think of the US and particularly Texas with its oil and gas industry. We think of Saudi Arabia and its oil, gas and, possibly one day, solar. Maybe we think of Canada and its hydroelectric and tar sands, but per capita the richest energy hub has to be Norway.
Ah, Little Norway. In terms of population it has just 5 million people and a landmass of less than 150,000 square miles. Much less than Texas and only about the size of Montana. Yet with massive oil and gas reserves, 256 gigawatts of hydroelectric power production, sustainable forests and the potential for tidal power in its fjords Norwegians pretty much top the pile when it comes to global per capita income and ownership of energy resources.
Yet sitting on all that energy isn’t, in itself, terribly profitable. So, copper producers are not alone in hoping to see the country expand its power sharing network of undersea cables with the rest of Europe. Norway just agreed to a $2.4 billion/420-mile subsea cable to carry 1.4 GW of spare hydroelectric supply to the energy-starved UK market, said by some to be teetering on the edge of blackouts if its madcap race to low emissions by 2025 hinders investment in stable supply sources.
The UK is mandated by the Climate Change Act to reduce its 1990 CO2 emissions by at least 80% by 2050, the fourth carbon budget (2023-27) will therefore require that emissions be reduced by 50% from 1990 levels by 2025. Likewise, Germany’s inexplicable early shutdown of its nuclear capacity has left the country dangerously low on generating capacity and actually emitting more emissions than it did 4 years ago when coal-fired plants were brought online to keep the lights burning. Norwegian transmission company Statnett, which already has undersea interconnector links with Denmark and the Netherlands, is said by the FT to be working on a 300-mile subsea cable to Germany at a similar cost to the UK project.
Enterprising as the Norwegians are, they are not alone in driving the interdependence of Europe’s power grids. A joint venture between the UK’s National Grid and Elia, its Belgian counterpart called project Nemo will see an interconnector linking Kent in the UK and Zeebrugge in Belgium that is expected to add an additional 1 GW to the UK’s electrical grid. The UK already has an existing network of international connections between the UK and France, the Netherlands and Ireland. Further connections help the national grids even out the supply from variable sources like wind with demand spikes that rarely coincide across different European time zones.
Copper demand for undersea cabling and associated onshore transmission and facilities will run in the tens of thousands of tons. Local cable manufacturers are hoping much of the business will remain in the EU. As an alternative to investing in yet more wind farms and with the benefit of making more efficient use of existing generating capacity you have to say these projects are welcome and, indeed, overdue. Just a pity they are not being driven by the EU but left to commercial interests to make them happen, but, then again, left to the politicians they would probably still be on the drawing board.
With the exception of geothermal energy most forms of renewable electricity generation have an intermittency to their delivery. Even hydro-electric power can fall short in periods of drought or low rain fall as the Chinese can attest to on the Three Gorges dam across the Yangtze River.
Hydro, though, is generally taken as the dream power source. Usually large, sustainable for long periods of time, non-polluting – apart from the millions of tons of cement used in the construction phase – and, once built, environmentally acceptable.
Wind in its various guises and solar have both received massive state funding, usually at the cost of consumer tariffs, and while the cost is coming down and the reliability is improving they are both inherently unreliable in terms of power delivery requiring back-up generation capacity which is expensive and fossil fuel-based. In addition, at least in the UK, there has been a massive public backlash to unsightly turbines dotting the countryside to the point where few onshore projects are now being approved.
Solar farms are also facing increasing opposition, termed a blight visually they are also criticized for taking up valuable farming land. There is one other form of power generation, however, which is as non-polluting, environmentally acceptable and potentially has even greater longevity than hydro and has potential to add leisure facilities if planned and coordinated properly – and that is tidal.
So having signed up in a moment of madness to ruinously expensive greenhouse gas emission targets, the British government is now welcoming a project that, if rolled out around the country, could generate some 8% of the UK’s power and last for 120 years.
Better still, the first stages of the project are being partially underwritten by private money in the form of the UK’s pension funds and insurance companies. Prudential is to be a cornerstone investor in an £850 million first stage Lagoon One tidal project in Swansea due to start construction next year and be operational by 2018 according to local reports.
Source: Tidal Lagoon Swansea Bay
The first phase of the project comprises a 6-mile horseshoe in the Swansea Bay, part of the Severn Estuary in South Wales, and will produce 320 megawatts of electricity, but subsequent stages will add 1.5 gigawatts and a further 1.8 Gw by 2025 with combined power costs below that of wind or solar on current estimates.
That depends on one’s definition of “come back,” but one thing’s for sure: the UK, which accounted for two-thirds of global production during the height of the Industrial Revolution, now only produces a paltry 12 million tons of the 1.6 billion tons of steel made globally. Capacity and jobs have both plummeted over the past four decades, and this FT video sets the context for the “Why?”
What we find interesting: high energy costs and green taxes.
According to the EEF, a British manufacturing association, by 2020, these climate-based costs will be about 50 percent higher in the UK than in the next-closest nation (Italy). The pricing for electricity and green tax is killing steelmakers there, such as Spain-based Celsa – just as EPA regulations are doing their part to hamper US steel producers – but, at the end of the day, the UK producers still are (read: have to be) optimistic.
A glimmer of hope exists for the landscape in the UK, as analysts are expecting a 2.4% increase in European steel demand. As Stuart wrote just last week, “Contraction has stopped in southern European states and has slowed in France, with economies continuing to expand in northern Europe; taken as a whole, with the signs of an upturn in Spain, modest growth this year is not expected to falter as previous green shoots have done.”
“Most folks, though, are looking to 2015 before there is a significant recovery,” he concludes. “For now, though, steelmakers will readily settle for 2% growth, even if they are struggling to get any improvement in prices.”
But the fact remains, unless the external costs lessen (which they most likely won’t) and UK producers find how to nimbly play in new markets, looks like there’s no real resurgence in the cards for the Industrial Revolution on the Isles – at least as far as the steel industry is concerned.
Agree? Disagree? Does it matter? Let us know – comment below!
Clear out the closet, empty those drawers, pull out the flashlight and rummage around in the garage — the middle classes are apparently being driven to selling the family silver to make ends meet, and for the dealers buying the jewelry and antiques, it’s a nice little earner, in the parlance of London’s East End.
We have written some time ago about the surge of business enjoyed by Britain’s pawnbrokers as the value of gold and silver has soared, but a recent FT article throws light on just how substantial the trading in, melting down and recycling of silver and gold wares have become.
Pawnbrokers of course lend money against the items deposited with them, and as such, are required to keep the items in safekeeping for a pre-determined time as security against the loan, but gold and silver jewelers have seen a surge of activity as the price of silver has risen from £2.95 an ounce in 2003, to a high of £29.25 in 2011; meanwhile, gold has gone up almost fivefold in the past decade.
Gold averaged £1,079 an ounce last year, compared with £222 in 2003 according to the paper. That relatively sudden rise in value has encouraged hard-pressed (and in many cases, previously well-heeled) middle class citizens to cash in their family treasures for some much-needed hard cash.
One jeweler in Birmingham, Lois Jewellery, has his little 16-kg (35-lb) smelter running once, sometimes twice, a day last year, scrapping 8 tons of jewelry and antiques worth some $380 million. Not all of it is recent cheap jewelry bought on foreign holidays though. Apparently the owner recently received a Georgian spoon worthy of the Birmingham Museum of Art, and the head of an auction house visited one of the city’s outlets and by chance rummaged through the scrap bin — finding a Cartier necklace which he bought from the smelter for $1,600, only to sell at auction for $14,000!
The article explains that in 2010, the UK recovered just under 70 tons of fine gold from melted-down jewelry, up from 4.5 tons in 2005. But the assay office believes there is plenty of household jewelry still to be scrapped, pointing to a Mintel report last September that found just 9 percent of women and 3 percent of men had sold gold for cash, while 14 million UK adults have jewelry they never wear.
The lucky auctioneer mentioned earlier, Stephen Whittaker, fears his experience may be the tip of the iceberg with far more rare pieces having slipped through unnoticed. “I would imagine 25-30% of our heritage of gold and silver antique jewelry has been scrapped in the last two years,” he is quoted as saying.
At least for the dealers handling the smelting and recycling of items, it has proved a lucrative trade, betting on continued high prices and a hard-pressed populace — up to 30 similar melting shops are planned or in the process of being started.
Back during the global market meltdown, it seemed as though every single metal producer announced line shutdowns or plant shutdowns. We all knew why, of course – demand had dried up like a raisin in the sun, or so the saying goes.
But with manufacturing demand healthy (and still growing according to numerous economic yardsticks, particularly in the US), US steel capacity in the upper 70-percent range, and despite some cautionary emerging market demand news from China, why would we hear so many stories of plant shutdowns and/or problematic restarts?
Our Hypothesis: Energy Policy
Though all energy-intensive industries pay very close attention to energy prices, aluminum producers seem to have taken a number of decisions in recent weeks as a direct result of domestic energy policies.
Take, for example, the closure this week of Rio Tinto’s Alcan’s Northumberland plant in the UK (pictured above). In a classic party debate between members of parliament (MPs), one side blames weak demand and overcapacity as the reason for the shutdown, whereas the other side blames “green taxes.”
For the record, Rio Tinto Alcan’s spokesperson gave the reason as, “Lynemouth smelter is already a high-cost operation and with increasing costs from environmental legislation and energy taxation on the horizon it is impossible to run the plant profitably in today’s market. Similar pressures are also being felt by other high-cost smelters around the world.”
We’d err on the side of Rio Tinto Alcan, in terms of the reason behind the closure. After all, despite slowing economic numbers within the UK and Europe, the economic outlook looked far grimmer back in 2008/2009, yet the plant didn’t shut down operations then. Instead, the decision likely came as a result of a carbon tax scheduled to go into effect in the UK in 2013, which will “add tens of millions to its costs, when it is already running at marginal profit,” according to this story.
Different Continent, Same Story
Here in the US, a similar drama has unfolded for aluminum producer Century Aluminum with operations in Ravenswood, West Virginia. In this case, the state government intervened with a $20 million tax rebate program, which — though it will not directly go to Century Aluminum — will see the producer receive the benefits of the legislation in the form of lower electricity prices. According to a recent article, the Ravenswood facility, when fully operational, consumes 10 percent of the state’s electricity. Like Rio Tinto Alcan, Century officials have voiced similar concerns about EPA regulations:
“Recent federal Environmental Protection Agency regulations regarding mercury, sulfur dioxide and other toxic air emissions also have company officials worried.
“We expect that future electric power costs in the U.S. will present severe challenges to our domestic smelting operations,” company officials said in the annual earnings report to the US Securities and Exchange Commission.
In a follow-up piece, we’ll explore Alcoa’s announcement of a shutdown for a plant it operates in Milan and how energy policy directly impacts capital spending within the US.
In another twist to the tale, a report in the FT says GM seems to be at an advanced stage of discussions with France’s Peugeot, also a struggling carmaker with excess capacity, to jointly develop engines, transmission systems and entire vehicles that would be sold under their respective brands. While this could have design and production cost savings, it would really only make sense if between them they closed excess production capacity.
While no shares will change hands in the proposed cooperation between GM and Peugeot, it has similarities to Chrysler’s cooperation with and later 53.5-percent takeover by Italy’s Fiat, the loss-making carmaker that owns the Lancia and Alfa Romeo brands in addition to Fiat. That merger could be said to be timely for Fiat, as the combined company reported a small net profit for 2011 and projected $1.5 to 2 billion net profit for 2012, largely on the back of a resurgent North American market for Chrysler brands.
On the other side of the coin, Tata’s Jaguar Land Rover (JLR) has been investing something like $1 billion per year for the last few years and is set to double this next year as it expands production in the UK and overseas, and takes on more staff to meet record demand. Tata Motors bought Jaguar Land Rover from Ford in 2008, for £1.5 billion, in a move some derided as a mistake. Last year, JLR made a profit of £1.1 billion and this year’s profits are expected to be even higher still.
GM probably missed the boat in selling its European operations back in 2009.
Who would buy them in today’s market is unclear. GM could still make the operations profitable; they have great research and design resources and some plants that are highly efficient. Arguably, in a world where smaller cars are likely to be a long-term trend, a European design and production base is a strategic asset that could be of considerable benefit to the global GM corporate.
However, GM as a group will not be willing to carry the cost of a loss-making European division for long, and unpopular as it will be among European governments and unions, plants are going to have to close.
Europe’s car companies could be said to mirror the European economies in the sense that there’s a stark contrast between the haves and have-nots, or between the profitable and the loss-making.
Unlike the US, where all carmakers were pulled down post-2008 and some teetered on the edge of bankruptcy while others actually went into Chapter 11, European carmakers are much more of a mixed bag. And before I get comments about government subsidies, let me say this: while they have over the years detrimentally impacted the structure of the European car industry, today’s winners and losers do not split neatly down the line between beneficiaries of state largesse and not.
In stark contrast to its parent, now (free of onerous pension obligations and high union pay rates) a highly profitable enterprise, General Motors’ European operations (which includes Vauxhall in the UK and Opel in Germany) lost $747 million last year, with $562 million of that coming in the final quarter of the year and including a restructuring charge of $200 million.
It has lost money in Europe for a decade, but targeted breaking even in 2011 as talks broke down to sell the business to Magna a year back. Even so, the loss is a marked improvement from the $2 billion deficit in 2010, the Telegraph reports, but is in stark contrast to a year of record global profits for GM group, where profits surged to $9.19 billion from $6.17 billion.
Perversely, GM’s rescue plan may include the closure of Europe’s most efficient car-making plant, Ellesmere Port in the UK, because GM is prevented from closing German plants until 2014 due to union agreements — even though the Bochum plant in Germany, which has a capacity of 160,000 cars but is said to need 3,100 employees to operate, compared to Ellesmere’s 187,000 capacity with only 2,100 employees.
We have heard many times over the years about metal substitution as a result of rising metal prices — the most classic case is probably plastic water pipes in place of copper — but everyone is likely to have their own example.
We have also heard, both in these columns and in the wider press, about the dramatic rise in metal thefts that has taken place as a result of the rise in metal prices.
Lead theft from church roofs, for example, has more than tripled in the last couple of years compared to the position just 5 or 6 years ago. The Church of England has reported 9,000 crimes of metal theft on its churches in the last five years, compared to just hundreds in the years before. Even more dangerous is the theft of copper from railway lines, both power and communications, which have caused thousands of hours of passenger delays in the last year alone here in the UK.
So it was probably inevitable that sooner or later the two trends would meet and metal substitution as a result of theft would become an issue for manufacturers of some metal components. Judged to cost in the region of $1 billion per year, metal theft is estimated to be the biggest loss of metals since the Second World War, when park and house railings were torn down for munitions and armaments, according to the FT.
While English Heritage, that organization that oversees the maintenance and restoration of historic buildings in the UK, is still firmly in favor of replacing lead with lead, they are beginning to accept that some locations sometimes suffering two or three thefts a year, have to consider alternatives.
The Church has therefore advised parishes to consider cheaper, less attractive alternatives, the most popular being powder-coated cast aluminum, which looks very similar to cast iron, but is cheaper to install and less attractive to thieves. Even plastic alternatives that simulate the look of cast iron are appearing on the market and beginning to gain market share.
Seeking to avoid the tragedy in South Africa where six children died in a single year due to the theft of manhole covers, new plastic covers are coming onto the market. Even though they cost more to buy, they are guaranteed for a minimum of fifteen years and have proved of zero interest to thieves.
The most-stolen industrial metal, though, is almost certainly copper. Although prices have come down from recent highs, scrap still commands close to Ã‚Â£5,000/ton ($8,000), making it pound-for-pound the most attractive bulk metal. Copper’s electrical properties make it irreplaceable — even if aluminum were used in its place, the thieves would find it almost as attractive; yard-for-yard, the value is about the same due to the need for a greater cross-section of aluminum.
Changing the law to prevent scrap dealers from dealing in cash would improve controls and traceability, and increasing paltry sentencing to levels similar to those applied to burglary may help. One change that is unlikely to resolve the problem is a collapse to historically low metal prices. Metal theft and product substitution are problems component manufacturers, just as building and infrastructure managers, are going to have to learn to live with.
The game has changed for the nuclear industry post-Fukushima, at least in the Western world, if not globally. After previous nuclear incidents, there usually was a pause while national bodies reviewed the reasons for the event and upgraded safety standards, but the Fukushima incident seems to be impacting Europe much like Three Mile Island did the US.
Germany, one of Europe’s biggest operators of nuclear power, used to run 17 reactors until Berlin closed four of them in July and committed to closing the rest by 2022. Belgium is looking to accelerate the closure of its seven plants and Switzerland is going the way of Germany. Even in France, where nuclear power generates more than 75 percent of electricity, the new socialist contenders for next year’s elections campaign on a platform that includes a drastic drop in nuclear-generating capacity to below 50%.
Who Benefits and Who Suffers?
As a result, not just generators are feeling the winds of change. Siemens pulled out of a technology joint venture with Russia’s Rosatom to develop new nuclear technologies. Recognizing that any new plants are likely to be in emerging markets, firms like France’s Aerva have started work on the Atmea, a smaller, cheaper reactor, in partnership with Japan’s Mitsubishi Heavy Industries rather than relying solely on the firms’ technologically advanced but high-cost EPR reactor design, best suited to highly regulated markets within Europe.
Likewise, Rosatom, which since Fukushima has continued securing new orders from China, Vietnam, Belarus and Bangladesh, is seeking new technology partners that can help it develop safer, more robust systems without pricing itself out of a market which will soon be competing with Chinese as well as existing South Korean manufacturers. Although Rosatom has a monopoly over Russia’s 11 civilian nuclear power plants and accounts for one-fifth of new reactors under construction worldwide, Sergei Kirienko, Rosatom’s president, admitted last week that there is a risk of world demand for nuclear reactors collapsing after Fukushima, saying competition has been much tougher.
For now, Britain is holding to its ambitious program for 12 new reactors by 2025, needed (the conservative part says) as part of a wholesale restructuring of Britain’s electricity market aimed at helping the country meet tough carbon reduction targets, as well as keep the lights on. However, start dates keep slipping back and although some operators have committed to land purchases for the new sites, no one believes the first plant will be operational by the previously stated date of 2018. Nor are the conservative coalition partners the Liberal Democrats on board with the plans for nuclear power, much preferring to push for wind or renewable power plants in spite of growing evidence they cannot meet base-load requirements.
Not surprisingly, the share price of both nuclear power-generating companies and manufacturers of nuclear power plants has underperformed in an already falling market. The future is unlikely to be quite as dire as some currently fear, but clearly growth is not going to be coming from established nuclear-producing countries such as the US, Europe or Japan. It will come from emerging markets desperate to reduce reliance on coal-fired power generation — and for whom the level of technological sophistication won’t be required to be as high as it is for Europe.