The Climate Bill is Dead (Sort of) What Next For the Metals Industries? (Part Two)

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Two days ago we examined where our energy comes from (e.g. what sources) and how much we individually consume. The larger point we made related to the fact that the existing bills on carbon cap and trade (including the one that passed the US House of Representatives) do not actually do anything to reduce our dependency on foreign sources of energy. Today, we wanted to examine how energy is consumed and the role of electricity  used in primary metal production.

We’ll start with how energy is used. According to Storm Technologies a company that provides engineering and technology solutions to electric utility generating companies, in a recent report, energy consumption for the US breaks out as follows:

  • Residential 21.75%
  • Commercial 18.43%
  • Industrial 32.32%
  • Transportation 29.10%

As a reminder from our previous post, the US obtains approximately 71% of its energy from domestic sources and the rest comes from imports. Only 6.8% of our energy comes from renewable sources, primarily hydro dams, one owned by aluminum producer Alcoa.

Now we’ll spend a minute looking at the industrial portion of that 32.32% (please note that cap and trade only addresses this portion of energy consumption and not the other three “consumers of energy) and specifically energy within the metals industry. Electricity plays the largest role in the aluminum industry. According to industry consultant James King, electricity makes up approximately 25% of total primary aluminum smelting costs (as of this writing – clearly when prices increase they may/may not be attributable to rising electricity costs). At $505/ton according to a presentation King delivered at the June 2010 Harbor Aluminum Conference, electricity remains a significant factor in aluminum’s cost structure.

For steel, the numbers look quite a bit different. According to our own BOF and EAF models (published as part of our quarterly price perspective series) electricity equates to approximately 1% of current production costs for BOF steelmaking and 6% for EAF steelmaking. Both of those numbers may seem like small potatoes but any increase in electricity and/or regulatory compliance costs can have a very big and real impact on the domestic steel industry’s cost structure (and certainly make US steel less competitive from an export standpoint). Obviously if energy prices increase, they could comprise a greater percentage of overall steel production costs.

Finally for copper, we have an entirely different set of issues, to some extent. Copper remains a key enabler of many emerging technologies thought to reduce CO2 emissions according to a recent Mineweb article and manifesto published by the European copper industry “The vision of a lower carbon transportation system, delivered by affordable, hybrid and electric vehicles, connected to smart grids, along with high-speed rail networks, requires copper. A hybrid passenger car contains 50 kg of copper for the electric motor, energy storage and transfer system.  The focus of the manifesto involves securing competitive copper production from European copper suppliers (subject to rigorous carbon cap and trade legislation). According to analyst Brooke Hunt, for the period 2004-2007, energy represents 10-25% of the value add.

The European copper industry has engaged in a number of activities to help influence regulators and keep the industry healthy. American producers have done and will need to do the same. Buying organizations will want to pay careful heed to any and all forthcoming regulatory actions to curb climate change as these regulatory and legislative changes may greatly impact key metal supply sources.

–Lisa Reisman

Postscript: Did you know that in 2003 the primary aluminum sector joined the U.S. Climate Vision program to further reduce PFC emissions. This goal of 53 percent reduction on direct CO2 emissions (a combined direct carbon emission from 1990 to 2010 based on PFC reductions and reduced anode carbon consumption) equates to an additional reduction of 25 percent since 2000. This goal was surpassed in 2005 with a 56 percent reduction from 1990. (Source: The Aluminum Association)

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