Author: Ben Debski

Public sector bonus culture overlooked

Posted on by Ben Debski

Over the years, a culture of paying out huge bonuses has become the norm in the private sector, most notably in banking, with top earners often taking home millions as a reward for a good year’s performance. However, the public sector might be thought of as having a more subdued culture with regards to bonuses. It would certainly seem that there is less of an incentive to offer them, as public sector institutions typically receive their funding from the taxpayer. Despite this, there is still a slight prevalence of bonuses in the public finance sector.

The PAHRC (Public Administration Human Resources Community) has completed a study which correlates the relative performance of workers and European public sector bonuses. It found that Italy is home to one of the strongest public sector bonus cultures, where the majority of bonuses are paid out without adequate performance reviews, leading to high payments in return for what might best be described as less than optimal performance from employees. In other EU countries, such as the UK and Germany, incentives are provided seemingly more closely tied to actual performance.

However, the bonus culture relating to public servants is under particular scrutiny in the UK, since London played host to many of the largest banking deals and bonuses during the period of rapid financial growth before 2008. It has recently been found that certain public servants have indeed been enjoying large bonuses. Civil servants in Whitehall have been found to be receiving bonuses totaling over £100m, a significant amount of money by any measure. The total of £105m is the combined total taking in many different civil servants, so it is not perhaps truly comparable to the multimillion bonuses taken by individual bankers at the height of the economic boom. However, the fact that individuals receiving these bonuses are in the public sector could be considered hypocritical at a time when governments are generally looking to make substantial cuts and savings in the public sector, in order to reduce deficits. It is also worth noting that not just banking sector civil servants receive sizeable bonuses in the UK; Moya Greene, CEO of the Royal Mail, was paid £142,000 as a bonus and this was at a time when the organisation was making losses.

Other countries in Europe also have a bonus culture; however, prominent players in the European economy tend to have a less tolerant attitude towards the paying of large bonuses in the private, let alone in the public sector. France and Germany have generally taken a harder line approach to the spread of bonus culture than the UK, which could be because London has a stronger history of being a centre for financial institutions. In Germany, fewer than 15 percent of employees receive bonus payment. Nevertheless, workers in the public sector in key European countries can and do earn extra pay as an incentive to greater performance.

Deep-sea drilling opens new possibilities

Posted on by Ben Debski

The oil business is totally dependent on a steady stream of new discoveries to feed the ever-growing demand from a vast number of industrial uses, not to mention generating fuel for millions of vehicles on the roads and railways around the world. Oil companies are constantly on the look out for new discoveries.

Norwegian oil giant, Statoil, has made a recent discovery, which comes at a crucial time for the company, as previous years had seen a decline in oil production. Existing oil deposits were becoming increasingly difficult for oil extraction, so the discovery of a pair of major new oil deposits will undoubtedly return the company to previous high levels of production. On January 9, the company announced that it had made its second significant discovery within twelve months, located in the Barent Sea. The first discovery is the Skrugard Field, which is also located in the Barent Sea. Statoil increased its efforts to find new oil fields in the Barent Sea area after making this first discovery and the gamble paid off, to the extent that the field is expected to produce an estimated 600 million barrels of crude oil.

The Tupi field in Brazil is still undergoing development, although it was first discovered in 2006. Drillers in the area hope to continue increasing oil production to an estimated peak of 500,000 barrels a day by 2020. Currently, the Tupi field has fifteen new wells, mostly controlled by the chief operator in the area, Petrobas.

Production from the BP Liberty project is expected to commence shortly. This project is quite ambitious and involves drilling down for two miles to reach the rich oil deposits and then drilling a further eight miles, in a horizontal direction, to actually penetrate the oil deposit layer itself. This procedure will cost around $1bn altogether, however, the investment will be well worth it, as the oil deposit is estimated to contain around 100 million barrels. BP hopes to produce around 40 thousand barrels a day by 2013, shipping it directly to the mainland via the Trans Alaskan pipe network.

Plantagon greenhouse sets eco standard

Posted on by Ben Debski

While most of Plantagon’s work to date has involved research, planning, and project proposals, the company has recently begun construction on its first project – a vertical urban greenhouse. The greenhouse is being constructed in Linkoping, Sweden and will be finished in 12 to 16 months. During the groundbreaking ceremony, CEO Hans Hassle said that the construction “marks the realisation of the vision of creating sustainable solutions for the growing cities of today and tomorrow, where we can grow food in the cities in a resource-smart way, making use of the special conditions of the city.”

The greenhouse will be the first attempt at constructing the model Plantagon developed in 2009, which features a spherical, translucent globe with a spiral ramp. Robots will maintain the greenhouse itself and, as the sun moves across the sky, its light will penetrate all levels of the greenhouse at varying degrees, even during the winter when sunlight levels are low. The greenhouse’s dome shape allows it to be inserted in any city. Plantagon intends to grow 15 types of leafy Asian vegetables in the greenhouse.

Plantagon was founded on the principle of working in harmony with the earth and its resources, rather than against them. The corporation operates on the principle that humans “cannot continue business as usual if we want to survive”, and that corporations should be “built from a deep sense of responsibility for the common good.” To that end, the corporation’s projects all involve urban farming and sustainable living. The company’s ultimate goal is to effect change by influencing existing corporations to adapt their business practices to benefit the earth and, ultimately, humankind.

The company offers several services based on environmental farming and development, including research and studies for farm planning, construction design, cost management for projects, manufacturing components, and post-construction reviews. All of these services are designed to provide urban agriculture that blends in with existing city landscapes.

Plantagon was founded through a joint agreement between SWECORP Citizenship AB and the Onondaga Nation in the US. Hans Hassle is based in Stockholm and joined the company during its initial development in 2008. Hassle has been involved in corporate social responsibility work since 1986.

Plantagon and Hassle have received numerous awards and recognition for their work in the sustainable farming industry. In 2009, the company won the International Globe Forum Sustainable Innovation Competition for its spherical greenhouse model. Hassle himself was nominated for the Sustainable Leadership Award in 2010, and Plantagon was selected as a finalist for Red Herring’s Top 100 Europe Award in 2011.

Oil sands interest grows

Posted on by Ben Debski

Between 2007 and 2009, RBS was involved in underwriting the largest volume of loans to companies active in tar sands extraction. A total of some $7.5bn changed hands in the process.

Since it was initially recapitalised in 2008, the bank has underwritten a further $2.5bn of corporate equity and debt to companies in the tar sands industry. During the same period, Barclays Bank was the leader in corporate equity and debt to companies involved in the tar sands industry with an amount exceeding $14bn.

The impact of tar sands exploration on the climate, indigenous rights and the environment in general has been highlighted in several publications, such as The Cooperative Bank and Dirty Oil – How the tar sands are fuelling the global climate crisis, by Greenpeace Canada and the WWF’s, Unconventional Oil – Scraping the bottom of the barrel?

FirstPensions claims that many extraction companies are not telling investors the whole story about the true long-term cost of tar sands extraction. In 2010, the organisation was instrumental in mobilising institutional investors to vote for shareholder resolutions that called on Shell and BP to publish full details of the underlying assumptions they had made regarding important environmental, financial and social risks when they decided to go ahead with tar sands projects.

Extracting oil from sand is a process that requires huge upfront investment in expertise and technology. Giant shovels, each one able to scoop nearly 100 tonnes of sand at a time, are used in the process. More than two tonnes of oil sands need to be extracted to produce a single barrel of usable crude oil.

A large volume of water is also needed in the process, since the ore has to be mixed with warm water to form a slurry. This slurry is then passed through a processing unit, which separates the bitumen from the sand/water mixture. The bitumen then has to be further diluted, using a special solvent, before it can be transferred through a pipeline to an upgrading facility.

In Alberta, Canada, oil sands have been in operation since the 1960s, but the speed of development has accelerated in recent years, particularly in the Athabasca region. This has started to attract the attention of institutional investors.

The Asians were among the first to become involved and the Korea Investment Corporation (KIC) has investment substantial amounts in companies such as Osum Oil Sands Corporation. In February Petrochina formed a joint venture with Athabasca Oil Sands and raised nearly $2bn of capital in an initial public offering.

However, the biggest investors, at present, are based in North America. After them, the largest concentration of tar sands investors, many of them institutional, are located in London. HSBC, Barclays and Royal Bank of Scotland are all heavily invested in tar sands extraction.

Utility provider Fortis to diversify through acquisitions

Posted on by Ben Debski

Fortis, Inc reported slightly higher revenues for the fourth quarter of 2011, as its investments in Western Canada utility plants began to pay off. Based in St. John’s, Newfoundland, the company has been around since 1987 and now owns a wide range of utilities, from electric and gas to hydroelectric power. It also now owns or operates property in the United States, Belize, the Cayman Islands and other parts of the world.

The company recently announced that it is raising its quarterly dividend by a penny to 30 cents per share. A planned purchase of Central Vermont Public Service Corporation was stopped when Quebec’s largest gas distributor, Gaz Metro Limited Partnership, out-bid Fortis for the company and their initial investment was returned.

According to Reuters, the company’s Fortis Alberta unit has been showing continued growth, which helped stabilise earnings and maintained the per-share growth. Net income for the fourth quarter, attributable to shareholders, rose to CAN$0.45 per share and the company showed a small rise in revenue of CAN$1.04bn.

Fortis has plans for both capital expenditure and systems development. Many of the transmission lines and supporting structures throughout the company’s service area are in need of upgrading and the company is evaluating each of them, before making recommendations for their replacement. Part of the company’s future planning is an electricity resource plan that outlines where upgrades are planned or expansion is in the pipeline.

On the West Coast, much of Fortis’ power is generated by four hydroelectric dams at Corra Linn, Lower Bonnington, Upper Bonnington and South Slocan. They all produce a steady stream of electricity, but require more and more maintenance. One of the ways Fortis is looking to the future is via its acquisition of CH Energy Group, the parent company of Central Hudson Gas & Electric. The recent agreement, which is valued at $1.5bn, is still awaiting regulatory approval. If that passes, as anticipated, the deal would be sealed in early 2013.

Fortis anticipates customer benefits such as “offsetting or deferring future rate increases, enhancing the quality of service to customers or making that service more affordable.”  The acquisition of CH Energy will be Fortis’s first entry into the US regulated energy market since the demise of its agreement to purchase CVPSC. Shareholders of CH Energy will also need to give their approval to the union, along with both state and Federal regulatory agencies. A waiting period, which is written into the American anti-trust laws, will have to be served.

This acquisition is a good fit, due to the similarities in, not only the type of business, but also the regulatory framework. The assets acquired in the purchase of CH Energy should provide a good “fit” for the overall operations of Fortis and should result in shareholders seeing continued growth in both assets and dividends for the foreseeable future. Fortis has also agreed to continue CH Energy’s well-known philanthropic presence in the area, following completion of the purchase.

Investors flock to build Kyrgyzstan

Posted on by Ben Debski

Kyrgyzstan has been in the news in the last few months as outside investors have announced plans to assist in building multiple infrastructure projects throughout the area.

One factor in the resurgence of international interest in the country is the election of the new president, Almazbek Atambayev. Until recently, Atambayev had given no clues about what his foreign policy, which will help to dictate the country’s course for the next six years, would be. Atambayev, who previously served as Prime Minister, made a visit to Turkey in January, suggesting that his early focus would be on strengthening the ties between the two nations, which may signal a shift away from courting larger nations such as the US and Russia for aid.

Along with the shift in power in Kyrgyzstan, other factors dictate the need for rebuilding. The US recently announced plans to withdraw most of its troops from nearby Afghanistan in 2014. Fears that the lack of a NATO-led security force might lead to area instability and increased cross-country crime, particularly drug trafficking, have caused some agencies to take steps to strengthen the social and economic infrastructure in Kyrgyzstan.

Poverty is also rampant in the country. As many as two million people don’t have regular access to clean drinking water. The mountainous landscape also provides little in the way of natural resources in the country, which has far less to offer in commodities than its neighbouring countries such as Turkmenistan, Kazakhstan, and Uzbekistan.

Infrastructure projects in the pipeline
The World Bank recently announced that it would provide over £10m of funding for the cities of Bishkek and Osh in Kyrgyzstan. The funds would be roughly split between grants and soft loans. The goal of the funding is to improve the country’s infrastructure in the two cities by remodelling residential and municipal buildings in the areas.

In January, Azerbaijan’s SOCAR (State Oil Company of Azerbaijan Republic) and the government of Kyrgyzstan announced that they would collaborate in the construction of a Kyrgyz oil refinery. The facility is scheduled to be completed by late 2013 and is expected to produce two billion tonnes of crude oil annually.

In an attempt to stem a possible rise in border crime, Russia has pledged a £10m aid package to Kyrgyzstan to reinforce country borders ahead of the United States’ withdrawal of troops from Afghanistan in 2014. The country has also pledged aid in a 3-year plan to fight against drug trafficking from Afghanistan.

During Kyrgyz President Atambayev’s recent visit, the government of Turkey agreed to provide assistance to boost Kyrgyzstan’s Defence Ministry, Security Council, and Frontier Service. Part of the aid will include providing funding for the construction of a military school in Osh for training armed forces officers. The two governments also discussed plans for opening joint defence industry factories and facilities for counterterrorism training in the future.

Nigeria struggles to rebuild Lagos

Posted on by Ben Debski

A number of major international cities – from Beijing, to Tokyo – are compelled to continually deal with infrastructure issues due to massive population and industrial growth. Lagos is currently facing similar concerns, which are compounded by several obstacles that have impeded infrastructure development in the past. In an attempt to deal with these issues proactively, the government has announced plans to undertake various construction projects that will enable the city to accommodate an influx of residents. Finding investor funding for these projects, however, has been a challenge.

Recent obstacles to progress
Lagos faces several issues that threaten to put a halt to the rebuilding. Land prices in Lagos are extremely high, since there is very little space available for commercial development. Nearly all of the residential buildings in Lagos are built horizontally, which means that in some parts of the city there are more buildings than people. The ability to construct high-rise vertical residence buildings has been hampered by a lack of regular electricity service, which would be necessary to supply power to elevators. Banks have also been loath to finance real estate construction projects in the city due to the slow progress of some previous work and the economic instability of the area.

The lack of funding for projects has proven to be an overwhelming obstacle to progress in Lagos. According to the city’s government, nearly £32bn (NGN8 trillion) is needed to completely improve the infrastructure of Lagos. Since the city’s current annual budget is about £2bn for all necessary services, finding the funding to expand construction has been almost impossible. Speaking about the shortfall, governor Babatunde Fashola explained the current dilemma: “Every year, the best we can ever manage to do is about $3bn. The calculation of our budget is about that size and that includes all the taxes that you pay, so you can see what we are up against.”

Upcoming projects
Despite the challenges of the past, several institutions are taking a chance on investing in Lagos’ infrastructure projects. The International Finance Corporation, an arm of the World Bank, has announced plans to build a hospital in Cross River State and may consider plans to undertake a second Niger River bridge project in the future. This project will serve a twofold purpose: constructing a necessary facility in the area and serving as a model for future investors. The plans will outline financing options, the role of stakeholders, strategies for conflict resolution, and government project incentives – issues that have led to the demise of previous construction proposals.

Along with the assistance of outside investors, the Lagos government is taking its own steps toward a more stable future for its residents. The newly developed Asset Management Corporation of Nigeria (AMCON) is coalescing real estate funding to create the biggest property development and management company in the area. The government is also consolidating several banks in an effort to increase capital for commercial lending for NGOs to construct affordable housing developments.

KREDL leads India to viable renewable sources

Posted on by Ben Debski

In India, the idea of developing renewable energy sources has been met with increased enthusiasm in recent years. High demands placed on the country’s power grid have led to a new awareness of the need for increased energy reserves. In response, the Indian state of Karnataka has established its own nodal agency, Karnataka Renewable Energy Development Limited (KREDL), to address the region’s energy concerns. The company’s current policy is set through 2014, and to reach its goals of renewable energy development, Karnataka has undertaken several energy projects.

KREDL was formed in 1996 as a state-run renewable energy agency. Prior to its founding, the Karnataka government was using three separate agencies to oversee and develop energy, but these agencies all tended to focus on conventional energy sources.

It serves as an administrator to assist alternative energy providers and projects.

In particular, the agency focuses on developing projects that involve biomass-based power, cogeneration power, solar power, hydropower and wind power.

Current and upcoming energy projects
According to recent studies, the state of Karnataka may have as much as 28GW of renewable energy that has as yet been untapped. During the summer of 2011, the government established a goal of reaching 350MW of solar power by 2013, and decided to invite developers to submit projects to develop up to 200MW of this new energy. To this end, KREDL began accepting project bids from various developers. By November 2011, 22 bids had already been received, which added up to about 80MW.

As time went on, more and more developers submitted project proposals, causing KREDL to increase the amount of energy it was willing to have developed by outside groups. The agency recently announced that enough projects had been submitted to cover all 350MW proposed solar energy development, not just the 200MW that was originally requested. Agency spokesperson Prasanna Kumar told reporters that the company had “received proposals to set up 350MW of solar projects… and all of it will be allocated in a couple of months.”

In the meantime, KREDL is going ahead with the Karnataka Renewable Energy Project, which uses agricultural waste such as rice husks as a source of clean energy. By using this material as an energy source, the agency prevents over 30,000 tonnes of CO2 emissions annually. Another benefit of this project is the fact that KREDL pays local Indian farmers for their harvested waste, providing a source of income to rural residents while manufacturing clean energy. The waste provides enough energy to power a 7.5MW generator, which is expected to power several remote villages for up to 30 years.

KREDL is also involved in raising awareness for alternative energy. In January, some students from the Seshadripuram Academy of Business Studies participated in an “Eco-Rally”, designed to increase public awareness of energy conservation. Karnataka Renewable Energy Development partnered in the rally, which included a student protest march and follow-up discussions about energy consumption.

To vote on The New Economy Carbon Leadership Awards 2012, click here.

Projects in Middle East demand attention

Posted on by Ben Debski

In 1994 the World Development Report published by the International Bank for Reconstruction and Development (often referred to as the World Bank) clearly highlighted the urgent need for infrastructure development and redevelopment throughout the world. 

Throughout the world, population growth demands governments to make huge investments in electric power installations, bridges, roads, airports, telecommunication systems, sewerage works, public water works, and other similar infrastructure.

In many Middle Eastern countries ageing infrastructure, such as roads, electricity networks, water treatment plants, and airports urgently need upgrading. To bring these improvements about, governments need tax income, but struggling economies often cannot provide a sufficient tax base to generate the necessary income.

The wars and upheavals in Iraq, Afghanistan, Libya, and Syria have caused extensive damage to the infrastructure of these countries. Roads and bridges have been destroyed, power plants are out of action, water purification systems are not functioning, and telecommunication systems have been damaged – in some cases beyond repair.

Some of these countries, including Libya, are now in a position where they have no choice but to accept loans from the IMF to repair destroyed infrastructure; this, of course, places a heavy burden on future generations.

At a meeting of the World Economic Forum on the Middle East and North Africa that took place in Marrakech, Morocco in late 2010, the Regional Vice President for North Africa and the Middle East of the World Bank, Shamshad Akhtar, said: “The region’s infrastructure needs are between $75bn and $100bn a year for the next five years, after experiencing an investment low of US$6bn in mid-2009.”

This was, of course, before the upheavals in Libya and Syria, and the Arab Spring uprisings.

In many ways Egypt’s infrastructure needs are representative of the needs of many other Middle Eastern countries.  The country faces the ongoing problem of reconciling a growing need for the upgrading of infrastructure and building new infrastructure with large budget deficits. The ageing and deficient infrastructure regularly causes gridlocked roads and power outages, which is inhibiting economic development and growth.

In 1988 Egypt was able to spend 12 percent of GDP on infrastructure; this figure had shrunk to five percent by 2007. With budget deficits usually in the range of eight percent of GDP, Egypt does not have much manoeuvring space apart from getting private investments to make up the shortfall.

In 2009 the government granted the first public-private contract – for the construction of the New Cairo Wastewater Treatment Plant – to a company called Orasqualia. The successful closure of the deal led Egyptian Trade Minister Rachid Mohamed Rachid to announce that Egypt was “aggressively seeking” further private partners for infrastructure projects.

US infrastructure in dire straits

Posted on by Ben Debski

The latest American Society of Civil Engineers’ Report Card for America’s infrastructure makes one thing very clear: a large part of the country’s infrastructure is in dire need of fixing.

They give D- ratings to drinking water, inland waterways, levees, roads, and wastewater. Aviation, dams, hazardous waste, schools, and transit all get D ratings. It is estimated that more than $2.2trn is needed to rectify the problems.

Drinking water
According to the society the US’s drinking water system faces mind-boggling public investment needs over the next two decades. At least $11bn will be needed every year to replace “aging facilities that are near the end of their useful life”, and to bring them in line with water regulations.

The society recommends a comprehensive federal plan to increase funding for improvements in water infrastructure and related expenditures. They also recommended the creation of a Water Infrastructure Trust Fund and several other funding options to make certain that this huge shortfall in funding can be met.

Inland waterways
The national network consists of more than 12,000 miles of navigable waterways which serve 41 US states – including all of the states lying to the east of the Mississippi River. There are 257 locks in the system.

Six years ago the US Army Corps of Engineers (USACE) classified 47 percent of these locks as “functionally obsolete”. If no new locks are constructed in the near future, by 2020 another 93 locks will become obsolete, which will mean that 80 percent of all locks in the system will be obsolete.

The society also recommended a comprehensive programme of updates to restore these strategic assets.

Levees
Levees have a direct impact on public safety. These man-made barriers – which include floodwalls, pumps, closures, drainage systems, and transitions – are often all that stands between a town or city and flood waters – as hurricanes Katrina and Rita so clearly showed. According to an initial report by the USACE, 177 of these levees are likely to fail in a flood event.

The society recommended the establishment of a National Levee Safety Commission, a nationwide inventory of levees, improved emergency plans, and increased funding to solve the problem.

Roads
The authorities can clearly not keep up with providing an efficient road system in the United States. Between 1980 and 2005, the total VMT (Vehicle Miles Travelled) increased by 94 percent for motor cars and 105 percent for trucks. During this period, however, the country’s highways only increased by 3.5 percent.

The increased traffic causes added wear and tear, delays, and higher accident rates. It is estimated that $240bn will have to be spent every year until 2020 to eliminate the backlog in road construction and maintenance.

Wastewater
The society’s report says that: “The physical condition of many of the nation’s 16,000 wastewater treatment systems is poor due to a lack of investment in plants, equipment, and other capital improvements.”

Many systems are on the verge of becoming obsolete. Older systems are beset with problems such as chronic overflows during snowmelt and rainstorms, which often cause the discharge of raw sewage into surface water. An estimated annual investment of $21bn per year will be needed to eliminate these problems.

Steel industry built to last

Posted on by Ben Debski

In the giant plants of Hebei Iron and Steel group, the biggest steel-maker in China, no less than 130,000 employees are at work. Established in 2008 through the merger of three companies in the Hebei province, the state-owned company with total assets of 190bn yuan [$30bn] is the second-largest in the world and a symbol of the nation’s voracious appetite for its output.

With 45 percent of the world’s steel pouring out of its factories, China has become the undisputed catalyst of a global industry in overdrive in practically every region except the EU. “China remains the steam engine of the global steel industry,” points out Ernst & Young industry specialist Peter Markey.

If China is firing on all cylinders, so is India. Already the fifth-biggest producer, it is forecast to leapfrog three places to take the number two spot within the next few years. At 54kg per head, current consumption is low by the standards of emerging markets but several elements have gone into the pot to change that.

In short order, central and regional governments have worked to eliminate some of the murky approval processes that created investment bottlenecks, encouraging more international investment. Around $1trn is due to be pumped into steel production in India over the next two or three years to satisfy the voracious maw of construction, infrastructure and automotive industries. The first two alone account for over 60 percent of consumption.

The financial crisis certainly didn’t slow South Korea. The sixth-biggest producer, it exploited the situation to reduce costs so dramatically that its two giants, POSCO and Hyundai Steel, are able to undercut long-time rival Japan by 36 percent on international markets. Indeed China is a major buyer from South Korea.

But that’s just in Asia. Blessed by ample supplies of coking coal, ore and scrap, blast furnaces are running 24 hours a day in Russia, the world’s fourth-biggest producer. They’re being fired by a government that feeds contracts and roubles to steel-intensive industries – automotive, machine-building, oil and gas, and manufacturing. Russia is also one of the biggest exporters of steel, with almost half of production being sold abroad by companies such as Severstal, Novolipetsk and Evraz.

One of the clouds on the steel-making horizon is a global shortage of raw materials such as coking coal, a vital element in production, and iron ore. According to steel analysts, there is no immediate likelihood of the dearth in coking coal being resolved, but this is a highly innovative industry and much work is being done on ways of reducing or even eliminating the use of coking coal in the production process.

Another looming problem is security and cost of supply. Inevitably, the rapid increase in growth in production has pushed up prices for all raw materials involved in the manufacture of steel and there has been a frantic scramble to protect reliable and affordable commodities through a variety of arrangements such as exclusive contracts and joint ventures.

The more innovative companies such as Nucor, one of the largest US producers that claims to recycle a tonne of steel every two seconds, responded to the rising cost of materials by developing higher grades of steel that attract higher prices.

The financial crisis only served to slow global production, but not everywhere and only briefly. It had grown at a merry seven percent a year to hit 1.327bn tonnes by 2008, but production plunged by 36 percent in the US and by 31 percent in the EU. Then driven by the booming economies of the big three – China, India and Brazil, production was back to 1.4bn tonnes by 2010. In fact the insatiable appetite for steel in China hardly abated with demand rising by 15 percent even in the middle of the financial crisis.

The distribution of steel is undergoing what could be a revolution to match in scale and significance what has happened in technology in the last few years.

Brazil’s industry, already boasting some of the best steel-making technology, is in the forefront of a sea-change that aims to control as much of the supply chain as possible. Having assured a ready supply of raw materials and low-cost production by gaining control of mines and energy producers, Brazil’s market-leading companies are now moving into logistics so they can distribute steel right up to their customers’ factories in just-in-time deliveries. The country’s fast-growing automobile industry is a direct beneficiary.

Some Brazilian producers are taking distribution a step or two further by establishing mills as satellite production units that add value to the raw steel, directly meeting customer requirements.

For the rest of 2012, industry observers such as Eurometals, the UK-based international trading firm, expect the industry to maintain what looks like more or less unstoppable growth. Although demand for steel may cool somewhat in China, its forecasts reveal that it’s rising in Japan as it recovers from the Fukushima disaster, in USA and in Brazil.

Meanwhile China is flexing its muscles in other ways. In late January it launched its first physical iron ore trading platform in a partnership with China Beijing International Mining Exchange and the powerful China Chamber of Commerce. Ominously for foreign competitors, Hebei Iron and Steel and other major producers  immediately signed up.

To vote on The New Economy 2012 Steel Industry Awards, click here.

Interest grows in the LME

Posted on by Ben Debski

The exchange has said recently that at least ten parties have expressed an interest in buying it and analysts have estimated its value at up to £1bn. Interest is believed to have come from the London Stock Exchange, the Singapore Exchange and the Hong Kong Mercantile Exchange, as well as London broker, ICAP. The Intercontinental Exchange (ICE) from the United States is also reportedly a suitor. ICAP’s chief executive, Michael Spencer, has been quoted as saying the LME is, “very, very interesting.”

Of course, as has been seen from the proposed, but now cancelled, merger of the New York Stock Exchange and the Deutsche Börse, other entities can easily abort any proposed deal. The EU blocked the merger of the NYSE and its German counterpart, based on fear of a “quasi monopoly”. These anti-trust fears, along with the immense size of the new company, raised the spectre of “too big to fail” scenarios, still raw after the recent financial meltdown.

Currently, LME’s major shareholders include J.P. Morgan Chase, Barclays Capital and Goldman Sachs, so any sale would require their approval and a proposed purchaser that did not appeal, due to over-regulation or other factors could end up being blocked. However, other factors will likely be at play and an industry source is quoted as saying, “I’m not so concerned about who buys the LME. I’m more concerned about a change in the way the LME is run. It needs to be modernised.”

The LME recently increased trading fees, which some say is merely a way to temporarily increase its value to potential buyers by raising revenue. LME, for its part, has said the increased revenue is necessary to update the exchange’s technology, meet regulatory requirements and increase competition. LME CEO, Martin Abbot, said, “The decision was taken by the board by a large majority. There is no provision for a revision of that decision,” so it appears the higher fees are here to stay.

Of the rumoured suitors, it is not clear which, if any, is most likely to be approved, though the largest corporations, for example, J.P. Morgan Chase and Goldman Sachs, would seem to have an edge, based purely on size and worth. Having said that, they are the very corporations that have a smudge on their reputations right now, which they may find difficult to overcome.

Of course, shareholders must vote on any takeover, as the LME is a member-owned organisation. However, with both members and clients going on record as being upset with the new fee structure, a backlash could actually end up hurting LME’s sale prospects. If clients wish to control costs after the new fees are in place, orders could be placed on a de-facto monthly contract, squeezing revenues for the LME rather than expanding them.

Since only 25 percent of shareholders need to reject the offer for it to fail, the new fees put an interesting twist on what had seemed a sure sale.