Natural Gas

The manufacturing world got some news late last week that is neither entirely uplifting nor completely dispiriting. The good news is that industrial production and capacity utilization did not decrease last month. The upward trend for US manufacturing continues, and we hope that it’s a sustainable one.

Growth continues, but not at eyebrow-lifting rates. According to the latest Fed figures, capacity utilization grew by 0.1 percent, from 77.3 to 77.4 percent. Industrial production was flat from January to February, but is likely to show an increase upon later revision — production figures initially showed no change for January, subsequently getting revised to show an increase of 0.4 percent.

The bottom line seems to point to one dominant issue (and two sub-factors) that challenges manufacturers and other sourcing organizations: uncertainty, brought on by 1) commodity/raw material price volatility; and by 2) the government policy landscape.

Commodity Price Volatility

Following the latest ISM PMI figure, which also decreased month-on-month in February but remained in positive growth territory, companies voiced concern over price volatility.

“Business is holding steady. Concern over commodity prices ongoing,” a chemical products manufacturer responded to the ISM survey. Another respondent, working in the machinery sector, said “”Still somewhat cautious about recovery. Expecting a good year, but not seeing orders yet.”

All metal categories were reported to be up in price for buyers, including aluminum products, copper products, rolled steel, scrap and titanium dioxide. The only commodity down in price was natural gas (which seems to be a trend that US and EU manufacturers are taking advantage of for the long term — see GM’s plans for natural gas vehicles, and a report claiming that 1 in 3 large vehicles in Europe will run on LNG by 2035.)

Manufacturing-Friendly Government Policy

Economist Chad Moutray, writing in the National Association of Manufacturers’ (NAM) Shopfloor blog, said that in order to see continued growth across all manufacturing sectors, Washington must put through more business-friendly policies.

This issue will be directly addressed at Day 2 of our conference, Commodity EDGE: Sourcing Intelligence for the New Normal. (The kickoff sessions begin later today!) Attendees will get both US and European policy perspectives at the panel discussion, “Public Policies Sure to Impact Sourcing Organizations.” 

Jennifer Diggins (Director, Public Affairs for Nucor Corporation) provides incisive policy viewpoints from the domestic steel industry’s perspective.

Thierry Decocq (Founder and Managing Partner of YQ Purchasing in Belgium) leverages creativity in the procurement process — if government policies are unbending, the wisdom goes, there must be more creative ways to structure your buys to help your margins.

And Mike Zadoroznyj knows a thing or two about regulatory compliance. As VP Product Center, Treasury and Regulatory Compliance Division at Triple Point Technology, Mike’s insight can help navigate manufacturers through periods of uncertainty.

In our messy policy landscape, manufacturers need to know which policies not only affect their business today, but which ones will rear their heads in the future. Uncertainty in prices and policies may reign for now, but equipping yourself with strategic sourcing practices to best meet those challenges — that’s up to you.

*Make sure to visit MetalMiner all day tomorrow for the latest updates from our panel discussions, keynotes speeches and breakout sessions!

Brought to you by Zycus, MetalMiner’s Sourcing Outlook focuses on cotton, natural gas, steel, copper and aluminum this month.

In our One-On-One interview, Lisa Reisman speaks with Omer Abdullah, co-founder and managing director of The Smart Cube, Inc., about how commodity forecasting can help your business.

The best things come to those who wait.

If you’re one of the folks who waited to register for the MetalMiner and Spend Matters manufacturing conference, Commodity EDGE: Sourcing Intelligence for the New Normal, do it now before time runs out — and boy, will your company’s procurement team ever thank you:

Need a few more conference details before signing up? Or glance at the high-level agenda?

Or how about a peek at our extensive list of confirmed expert speakers, from industries and sectors running the gamut from metals manufacturing to energy to plastics (and beyond)?

See you next Monday in Chicago!

Continued from Part One

It is no surprise to hear that a government keen on subsidies is talking about extending the electric vehicle (EV) tax credit, currently worth $7,500 to $10,000, and including cars that are designed to run on natural gas, such as Honda’s CNG.

Honda and Ford — who produce a natural gas pick-up truck — are soon to be joined by new models such as Chrysler’s Ram 2500 Heavy Duty pickup (due out in July) and GM’s Chevrolet Silverado and GMC Sierra 2500 HD (due out later in the year). GM’s trucks are said to overcome one of the drawbacks of early natural gas autos — that of limited range.

Fitted with both gasoline and natural gas tanks, and an engine that will switch from one to the other, the new GM trucks are said to have a range of 650 miles — pretty good for such a large gas guzzler.

New models and government subsidies may help overcome buyer reluctance regarding range and buying price, but worries of fill-up points, as with EV vehicles, remain a major barrier to wider acceptance. Another of President Obama’s initiatives is a proposed $1 billion National Community Deployment Challenge, which is said to include support for the development of up to five regional liquefied natural gas “corridors,” where “alternative fuel trucks can transport goods without using a drop of oil,” the White House is reported as saying.

This proposal underlines the focus for most in the industry that natural gas will remain a fuel more suited for fleet vehicles, or those on known routes, than private medium- to longer-distance users who require greater flexibility.

Still, clearly Chesapeake and other natural gas producers like them will be hoping that any increase in natural gas usage is worth having, as good as low prices are for the US — the resulting glut has all but halted further exploration.

*Are you a natural gas or oil buyer? Find out the best ways to mitigate commodity price risk — don’t miss our upcoming conference, Commodity EDGE: Sourcing Intelligence for the New Normal:

An FT article last week lauded the intent of General Electric and Chesapeake Energy to form an alliance to promote the use of natural gas as a fuel for cars and trucks.

The intent is to develop gas re-fueling infrastructure with a target to add 250 compressing and recharging units principally at gasoline filling stations. Currently there are about 1,000 natural gas fillings stations in the US, according to an article in the South Bend Tribune; but only half of those are available to the public, with the rest operated by local governments or private companies to refuel buses and other fleet vehicles.

Compare that to regular gasoline fuelling stations of which there are said to be some 159,000 outlets in the US.

Indeed, there is only one car produced in the US to run on natural gas, the Indiana-built Civic Natural Gas Honda. Around 13,000 have been sold since the car first went on sale in 1998, mostly to fleets. With such low production runs, currently about 4,000 per year, Honda can’t be making any money out of the model even at the high premium over the gasoline versions — some $10,000 on the base model — but should be applauded for sticking to their script. They clearly realize natural gas cars are going to be, like electric vehicles (EVs), a long-haul technology.

But why would Honda, General Electric, Chesapeake and the big three automakers (GM and Chrysler are to follow Ford with natural gas pickups) be supporting what must be the least well-known among the alternative fuel sources?

Cost

Putting initial vehicle costs to one side for a moment, for an equivalent energy content, crude oil is roughly seven times the current price of natural gas in the US.

GE and Chesaspeake are quoted as saying that at today’s prices, a vehicle driving 25,700 miles a year would save $1,500 a year from using natural gas rather than gasoline, while a Channel 13 News report interviewed a canny individual who had plumbed natural gas supply to a compressor in his own home for about $3,000, so he could fill up his car’s natural gas tank at home for an estimated $7 compared to over $50 for gasoline.

The environmental lobby is torn. Diehards prefer EVs for their zero emissions, conveniently ignoring the fact that they require power stations to generate the electricity by saying that if the power comes from a wind turbine or solar farm, it is almost zero emissions. In reality, of course, that is rarely the case; but the attraction of natural gas is that (although not pollution-free) it is much less polluting than gasoline.

According to the State of California, quoted in Earthlinktech: “Typical CNG vehicles can reduce smog-forming emissions of carbon monoxide by 70%, non-methane organic gas by 87% and oxides of nitrogen by 87%. Also, CNG vehicles typically have 20% fewer greenhouse gas emissions than gasoline powered cars.”

To be continued in Part Two.

Lisa Reisman, managing editor of MetalMiner, tells the truth about why manufacturing conferences rarely wow her, and how we’ll be overcoming that with Commodity EDGE: Sourcing Intelligence for the New Normal. 

Watch the whole video — you’ll be pleasantly surprised!

Much of the news surrounding President Obama’s 2013 budget proposal centers on his plan to “tax the rich,” and granted, it’s a contentious issue, whether you see the merits of the plan or think that it’s completely off-base for solving the country’s problems.

However, as far as the metals sourcing world goes, a much more important section of Obama’s 2013 budget contains the Department of Transportation (DOT) line items. As MetalMiner’s previous discussions with Roger Ferch of the National Steel Bridge Alliance showed, much needs to be done between federal and state governments to provide a clear path for the implementation of Buy America, for example, as it relates to infrastructure, thereby supporting the steel industry (and other metal sectors).

In another interview with Jennifer Diggins of Nucor (who will be speaking at our conference, Commodity EDGE), Diggins stressed that legislative steps must be taken to remedy the US’ crumbling road, bridge, air and water infrastructure to secure the competitive advantage of domestic manufacturing. However, in context of Buy America, implementing federal funding is a different story: “We’re continuing to run into issues where federal dollars are going through different federal agencies other than the DOT, and once it hits the state level, (we’re unsure) what they actually do with it,” she said.

So by the look of the 2013 transportation budget, there is much more at stake for US workers and manufacturers.

Transportation Breakdown

Obama proposes to double the Transportation department budget over the next six years, including a 2 percent overall increase ($1.4 billion) in funds for the next year, according to the official document. It also highlights a $50 billion pledge for 2012 to improve roads, bridges, transit systems, border crossings, railways, and runways; $47 billion over six years to build up a high-speed rail network; and more than $1 billion in fiscal 2013 for the Next Generation Air Transportation System, which will update air traffic control systems.

The money will come from a “peace dividend” — in other words, cash no longer being used to fund the military wartime efforts in Iraq and Afghanistan.

However, some point to these proposed amounts still not being enough to cover the country’s infrastructure needs. The Washington Post points to “a 2010 report by 80 experts, led by former transportation secretaries Norman Y. Mineta and Samuel K. Skinner, call[ing] for an annual investment of $262 billion in the nation’s deteriorating transportation infrastructure…that estimate may even be on the low side.”

Another Key Budget Area: Energy

Although Obama proposes to cut out $40 billion of tax breaks for the oil and gas industry — which could have adverse effects on metals producers/suppliers, especially those that supply oil and gas infrastructure — “the Energy Department budget also includes $12 million for a multiyear research effort to reduce risks associated with hydraulic fracturing in shale formations. Pipeline safety would receive a 70 percent, or $64 million, increase,” a Bloomberg article reads.

If the federal government pools its efforts with the gas industry rather than working at cross purposes, this piece of proposed budgeting could actually help companies like Halliburton create cleaner ways of fracking, or replacing fracking with new technologies entirely.

All in all, the DOT budget line items don’t seem to be the crux of the impending battle between Democrats and Republicans over approval. But the increased outlays for infrastructure seem to reflect Obama’s rosy view of where the US economy is going. His administration is projecting GDP growth to be 2.7 percent, which many analysts think to be overly optimistic.

Ultimately, whoever is in the White House a year from now, it’s clear that infrastructure investment is clearly a priority; but so is sound, efficient implementation and accountability. Otherwise, domestic manufacturers and their workers will suffer.

Never, it would seem, has the oil market been in such a state of disarray.

Brent crude, the global benchmark, hit US$117 per barrel this week for the first time since August. The spot price has been rising on concerns over where the showdown with Iran is leading. European consumers have begun to cut back on purchases ahead of an outright ban when sanctions are introduced.

Meanwhile the Chinese, usually buyers of some 20 percent of Iran’s output (or about 550,000 barrels a day) are said to have cut back by 285,000 barrels in January and February, and are now extending this to March. This has less to do with supporting the Western embargo and more to do with slowing domestic demand and possibly some gamesmanship in applying pressure on the Iranians for bargain-basement prices.

Likewise, while India, Iran’s second-largest customer at an average 341,000 barrels per day, continues to buy, they too are applying pressure for discounts. Saudi Arabia has increased production, as has Russia, and both Iraq and Libya are increasing output every month.

No Worries, We Still Got Texas Tea

In fact, the world is not short of oil yet, to the irritation of North American producers (and the delight of North American consumers.) West Texas intermediate crude prices are at a record discount to Brent.

For a number of reasons, including outages at Midwest refineries causing a drop in demand, tight pipeline and storage capacity and a rise in supply (notably from the Canadian oil sands and from the Bakken shale oil region of North Dakota), the US is awash with oil, forcing not only WTI to trade at a widening discount to Brent, but Canadian synthetic crude to trade at a discount to WTI. From a discount of $31.25 per barrel a month ago, Western Canadian select heavy crude is at a $31.25-per-barrel discount to WTI this week, about 50 percent of the spot Brent price, according to the FT.

Spread ‘Em

Maybe the most interesting disconnect in the market is the forward spread curve for Brent crude. Throughout the boom period of 2004-08, Reuters reports the spot and forward oil prices moved in tandem, but now forward prices for 2015 are at a $19-per-barrel discount and have remained remarkably steady even as the spot price has risen in the wake of rising tensions with Iran.

While the forward price curve is not a prediction of the price of oil in the years ahead, it is often taken as an indication of where the market expects supply and demand to balance out. The paper postulates that the rise of oil shale fracking will have a similar (if less pronounced) impact on the oil market that gas fracking had on the natural gas market.

They also suggest rising conventional supplies from Libya, Iraq, Brazil and elsewhere will supplement current supplies, and point to Saudi Aramco’s decision to cancel investments planned to lift the kingdom’s production from 12.5 to 15.0 million barrels per day as evidence of that. Lastly, although much demand growth is predicated on the rise of an emerging market middle class, a combination of greater efficiency in the use of oil and falling Western demand will diminish the impact of that effect.

One element that does seem likely to persist (for the medium term, at least) is North America’s energy advantage globally. Neither lower natural gas nor lower oil prices are likely to equalize with the rest of the world anytime soon and while no one is suggesting it will lead to long-term energy-intensive investments like aluminum smelters, it will provide a welcome boost to more energy-dependent industries in North America relative to many other parts of the world for some time to come.

Capitalism is a wonderful thing. It can create so much wealth, spur so much research and progress that we sometimes take on blind faith that unrestrained pursuit of profit is a good thing.

But large energy consumers in the US are asking the question: what is more beneficial — profit for the few or wider employment for the many? It’s not a new question and it is a balance on which societies are constantly having judgments on; but the recent fall in natural gas prices due to the development of shale gas has caused issues of this nature to be debated among business leaders and politicians anew.

Natural Gas Price Activity

The fall in natural gas prices due to shale gas development has meant US gas prices are below world prices, both a major boon for energy-dependent industries in the US and an opportunity for gas producers to develop overseas export markets for Liquefied Natural Gas (LNG).

An FT report says US gas prices are only about $3 per million British thermal units now, and a little over $5 in the forward market for 2017, making exports of LNG from the US to Asia and Europe look highly attractive.

As this graph from the EIA Annual Energy Outlook 2011 illustrates, shale gas is forecast to constitute up to half of future supply, but currently has added maybe 25-30 percent to total supplies:

Source: EIA

The US Department of Energy has received at least eight applications for the development of export LNG facilities, which combined have sought permission to ship 10.9 billion cubic feet per day to markets worldwide; that’s about 18 percent of US gas production.

Clearly by the time these plants are all fully operational – assuming permission is granted – shale gas supplies are projected to have increased further, but it does appear that at 18 percent of total US gas production, exports would deprive the domestic market of much of the additional supply shale gas has currently created.

Should I Stay Or Should I Go?

The fear for large energy users like Alcoa and US Steel is that gas (and therefore electricity prices) would rise again as the natural gas market became tighter if unrestrained exports were permitted. Those campaigning against unrestricted exports are not saying they should be totally banned; those given the go-ahead should obviously proceed, and possibly there is room for some of the balance; but they are suggesting a thorough review on a case-by-case basis with the backdrop of future US reserves, supply and prices taken into account.

So the debate centers on whether the US should be an exporter of raw materials/commodities such as natural gas, or use that low-cost resource to manufacture products with higher value-add. The argument that the US should not be in more polluting basic manufacturing activities does not hold water — simply shipping the production of those commodities offshore to places like China does not make the CO2 emitted any less or the process any more efficient; probably quite the opposite.

Supporters of LNG exports say the US has sufficient reserves (if all shale gas resources are exploited) to last for a hundred years at current rates of consumption. Others would say, what better gift to bequeath future generations than a low-carbon, low-cost, low-pollution energy resource?

–Stuart Burns

Source: cartoonstock.com

In 2011, the two energy industries that received perhaps the most attention in our coverage were oil and gas (due to the tremendous potential for further exploration and drilling for crude, shale oil and shale gas), and nuclear (due to the cloud of questions post-Fukushima).

The readership of such pieces reflected that:

1. In Wake of Japan Tsunami, Is Global Nuclear Power Freeze the Answer?

2. Shale Oil Could Be US Answer To Reliance On The Middle East

3. A Different Take on the Japanese Tsunami: Long-Term Impact on the Nuclear Industry

MetalMiner also released a series of interview videos related to the energy sector policy:

–Taras Berezowsky

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