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Posts Tagged ‘energy’

The coal boom: burning ambitions

February 1, 2011 Comments off

“The IEA estimates that China, which generates more than 70% of its electricity with coal, will build 600 gigawatts (GW) of coal-fired power capacity in the next quarter-century—as much as is currently generated with coal in America, Japan and the European Union put together. China’s efforts to improve coal supplies include the building of a new east-west passenger railway line, set to open in 2013, which should free existing tracks for coal transport. New high-speed and light railways across the country may alleviate bottlenecks further. But for the foreseeable future the country will depend on ships laden with foreign coal. … America, the world’s second-biggest coal producer after China, has mammoth reserves and a power industry that is turning against coal. Environmental regulations and cheap shale gas will leave miners looking for new markets overseas.”

The Economist's analysis of global coal reserves

Source: The Economist, January 27 2011

Observations:

  • The IEA’s Global Energy Outlook 2010 foresees a stabilization of the global coal fired electricity generation around 2020 at 11TWh, approx. 40% above current level.
  • China’s share of global coal production has increased from 25% in 1995 to 39% in 2008. Still the country recently turned into a net coal importer, especially facing high demand for imported metallurgical coal.

Implications:

  • China’s coal reserves are definitely not infinite. The 38yrs lifetime calculated by the Economist will be a reason for the Chinese government to eliminate the coal-dependence for electricity generation long before 2050. However, the climate change battle will be fought in the era of growing coal consumption in China.
  • India still has a lot of coal reserves and the government is trying to create alignment in the national coal mining sector to enable increased output. However, imports from Indonesia, South Africa, Australia and potentially the USA will certainly be needed in India to enable a building boom like China has experienced in the past decade.

©2011 | Wilfred Visser | thebusinessofmining.com

Rusal’s Deripaska forecasts smelter closures

June 10, 2010 Comments off

“Aluminium producers will shut down as much as 3m tonnes of capacity by the end of the third quarter if metal prices remain at current levels, according to Oleg Deripaska, chief executive of the world’s biggest aluminium producer.

Aluminium prices had tumbled to about $1,900 a tonne, and most producers were unable to cover the costs of powering smelters and distributing the metal, Mr Deripaska told the Financial Times.

‘If [the aluminium price] will be at this level at the end of the second and third quarters, we will see 2m to 3m tonnes shut down, all around the world,’ he said. That would represent about 8 per cent of global production, which stood at 37m tonnes in 2009, according to analyst estimates.”

Source: Financial Times, June 10 2010

Observations:

Cash Buyer Primary Aluminium price (www.lme.com)

  • Aluminium price peaked mid 2008 above $3,000 a tonne. After a dip early 2009 the price is fluctuating around $2,000 a tonne, with break-even price for many producers around $2,100-2,200.
  • Last month Vale sold its Aluminium assets to Norsk Hydro arguing the rising cost of electricity made the business too risky.

Implications:

  • Energy costs will play an increasingly important role in the smelting business. Production costs are increasing so much due to energy price increases, that some smelters will go out of business permanently.
  • When companies can choose where to process, the balance between transportation costs and energy costs is shifting slightly, making transportation of ore over greater distances feasible. However, as both smelting costs and transportation costs are mainly driven by fossil fuel prices, the change will not be disturbing.
  • Smelting in countries where energy prices are not so dependent on fossil fuel prices is becoming increasingly attractive.

©2010 – thebusinessofmining.com

Norsk Hydro buys Vale assets

“Norsk Hydro has agreed to buy the aluminium assets of Vale, the Brazilian metals and mining group, in a $4.9bn deal that will secure the Norwegian company’s raw material supplies for decades. The move will give Norsk Hydro control of Paragominas, the world’s third-biggest bauxite mine, as well as Vale’s alumina refining and aluminium production facilities in Brazil.
Norsk Hydro, Europe’s third largest aluminium maker, said the deal would boost its competitiveness by providing a long-term supply of high-quality, cost-efficient raw materials. The Oslo-based company, 43.8 per cent owned by the Norwegian government, will pay Vale $1.1bn in cash, with the remainder in new Norsk Hydro shares and $700m of assumed net debt.”

Source: Financial Times, May 3 2010

Observations:

  • Norsky Hydro ensures access to large resources of bauxite, thus reducing the risk of price volatility between miners and processers.
  • Vale’s cash position has improved after the combination of this transaction ($600 million cash now + $200 million in 2013 and $200 million in 2015) and last week’s acquisition of the Simandou assets, for which it had to pay only $500 million immediately.
  • Vale gives as a rational that “its participation in the primary aluminum metal industry is small, and has no growth potential due to the lack of access to low-cost sources of power generation, as energy is a key factor for the competitiveness in this business. “ (Source: Vale press release, May 2 2010).

Implications:

  • Vale transfers the risk of electricity costs (and potential associated carbon emission costs) to Norsk Hydro.
  • Vale appears to be focusing more on the iron and steel market. However, in order to reduce dependency on the iron ore price targeted acquisitions of companies with good resources of zinc, chromium & nickel or precious metals (given the current operating margins) are likely.