New EPA Rules Set to Slam Metals Markets, Cost Structures, Manufacturing Competitiveness

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This will be what a nickel mine looks like with phytomining. Even the happy wind turbines in the background are welcoming... unless you're a bird.

Perhaps no piece of legislation or regulation will make as profound an impact on energy markets and large downstream consumers of energy (including steel and aluminum producers) as the recent carbon power plan announced by President Obama and released by the EPA on June 2.

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The executive order marks the first time that industry will face a mandatory requirement to reduce carbon emissions.

For the moment, we will forget the fact that the president could not generate enough bipartisan support for a similar program through the legislative process in which elected representatives would have a turn at compromise and debate.

Instead, the impacted business communities and environmental activists will have the opportunity to influence the rule-making process through the open comment period that goes until October 16, 2014. Business groups such as Better Energy Future, composed of dozens of industry trade associations including the Metals Service Center Institute, The American Foundry Society, the National Mining Association, Non-Ferrous Founders’ Society and many manufacturers’ associations, have come together to coordinate strategy and articulate rule recommendations to the agency during the open comment period.

The opposition to the rules centers on several arguments, including: expansion of rules to other industry sectors (beyond power plants) as well as to other energy sources such as natural gas; rising energy costs, poorer energy reliability, ceding American ingenuity with regard to the development of new energy technologies, regional disparities and burdensome impact on states with greater manufacturing activity (often dependent on low-cost and reliable energy sources), lack of state flexibility in terms of how the rules will get implemented and finally that the rules should not require the US to act alone, allowing the rest of the world a competitive advantage.

From our vantage point, rising energy costs and lack of energy reliability should form the basis of any argument against the rules. Both will result in a loss of American global manufacturing competitiveness, rising imports of products not subject to regulations and decreased manufacturing activity where high-cost energy becomes a non-starter. In fact, we’d argue that primary metal production could be at risk as soon as the final rules go into effect. We have seen Ormet close a facility and many others including Alcoa close US facilities while those that remained open depend upon cost-effective energy sources, particularly for Century Aluminum.

The steel industry, of course, relies on cost-competitive energy sources to maintain its competitiveness.

In a follow-up post, we’ll take a look at the potential impact of rising energy costs on both primary aluminum and steel production models, particularly EAF production models which contain a large portion of recycled content but require vast amounts of power. We will also explore some of these other arguments in greater depth.

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