The Hindu Business Line : Energy crunch likely to affect global metals sector

Mumbai, March 22 In the global metals sector, supply-side issues have been on top of market concerns for sometime now. While the demand side has exhibited robust performance in terms of growth and even now shows extended potential, supply uncertainties have continued to disrupt market fundamentals from time to time. Wage negotiations and labour action have been a part of the supply-side hiccups.

However, a more serious, and perhaps pernicious, development may be on the horizon; and it has the potential to cause havoc in the metals markets in the medium to long term, if not addressed with urgency. It is well known that metals production is highly energy-intensive. Energy shortages andhigh-energy costs are highly likely to impact the global metals market. The world may be witnessing the emergence of a structural tightening of the world’s primary energy markets and as a result, higher shifts in prices. The implications of this for metals production are already occurring on a global scale.

Decades of under-investment and strong non-OECD demand mean that the energy grip on metals markets may have only just begun to tighten, according to a special report prepared by Barclays Capital Commodities Research. Based on energy-related events to date, lost base metals production has been estimated to mount to just under one million tonnes.

In case of precious metals, platinum has been the most affected with losses totalling 9 per cent of total production. Five countries combined account for over 10 per cent of base metals production, and a large potion of precious metals production where power rationing may be close to being enforced, asserts Barclays Capital. In addition, power capacity is falling in four other countries which currently account for one-third of both base and precious metals production.

In these countries demand growth has caught up with generating capacity; and although power availability may not be an immediate issue, if supplies are not brought to the market in a timely manner they may be forced power ration, the report observed adding that the energy environment for metals producers is changing drastically. Fast expansion in future metals supply will face immense challenges from high-energy prices and constricted availability.

Rising primary energy prices – those of oil, natural gas, coal and even uranium – so far this decade have been a key feature of the energy market. It is also becoming increasingly apparent that there are severe and binding constraints in electricity generating capacity in both OECD and non-OECD regions.

Barclays Capital maintains that the forces at work pushing energy prices higher are not cyclical but structural. Upward shift in non-OECD demand and binding constraints on supply growth are structural in nature. These forces are leading to a bullish outlook on energy prices (crude, natural gas, coal)and in turn, metals production costs.

Longer term, climate change and poor resource management combine to result in water shortage. Examining regions at risk, the report has identified five countries atrisk - South Africa, Brazil, Chile, Indonesia and Thailand. These have critically low levels of power reserves. Worse, reserve levels are projected to fall below normal planning levels. Power rationing in the countries may become necessary.

The report goes on to suggest that four additional countries – Peru, China, India and Australia – have seen demand growth catch up with power capacity; and these countries face the need for more power supply. If supplies are not brought to the market in a timely manner, they could be faced with the same need to ration power.

In addition, constraints to fuel availability, the amount of precipitation for hydroelectric production, or electric transmission constraints could hasten power rationing. However, for 2008, power availability at a national level is not an issue for these countries, the report clarified.

India: Describing the country as the emerging giant, the report said India was waking up with a growing thirst for energy. However, chronic under-investment in the country’s power sector has been a major constraint to development. Like China, economic growth in India has resulted in demand growing rapidly; but supply has not kept pace. Power cuts and unstable voltage – both signs of insufficient capacity and inadequate transmission infrastructure – are commonplace.

The gap between demand and maximum supply nationwide reached 14 per cent in 2006 during peak hours. Unreliable power and unscheduled power cuts have resulted in higher costs for power-intensive and continuous-process industries in particular. The weakest part of the supply chain in India is the distribution sector. Losses of electricity due to theft and technical factors average about 35 per cent of total generation, the report pointed out.

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