Industrial Insight

Wind is expensive.

January 30, 2011
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NUMBER OF THE WEEK: $5,975/kW. That is what the U.S. Energy information Administration published as the estimated “Overnight Capital Cost” for Off-shore Wind, in its “Updated Capital Cost Estimates for Electricity Generation Plants, November, 2010.” The estimates are developed for plants of certain specific sizes explained in the study.

“Overnight Capital Cost” is a somewhat vague concept. It can be considered as the cost as if the plant suddenly appeared overnight, fully operational. It does not include the interest costs incurred during the planning and construction of the project.

The cost includes site work and all equipment and installation, indirect costs, fees, contingencies, and owners costs (excluding financing costs) but including developer’s profit. Further, the cost does not include any special transmission lines needed to deliver the electricity over distance or any possible back-up such as that required for wind and solar.

Direct comparisons with other types of plants are not exact, but, if used cautiously, useful for approximation. For example, a Dual Unit Nuclear plant is estimated to have a capital cost of $5,335/kW.

At first glance Offshore Wind, with a capital cost of $5,975/kW, appears to be roughly comparable with nuclear. However, one must consider that the average annual production from wind is roughly 30% of nameplate capacity while, in the US, nuclear production is over 90% of nameplate capacity. Thus, as measured by average annual capacity, the electricity produced from offshore wind becomes very expensive, about three times that of the same output from nuclear.

This high cost is even before calculations of the high cost of transmission lines and expensive back-up for wind are included. Further, a nuclear plant has a life of 40 years or more while wind has a plant life of about 20 years. When considering the corrosive effects of salt spray, the plant life of offshore wind is probably well less than 20 years.

Again, one must be cautious when using the above numbers for direct comparison. The complete study, including operating and maintenance costs, is referenced under “Energy Issues.” A fuller comparison between wind and nuclear by Kent Hawkins is referenced under “Whistling in the Wind.”

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Whio pays corporate income taxes??

January 30, 2011
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January 27, 2011, 1:33 pm

Corporate Taxes: More Winners and Losers


The analysis was provided by Aswath Damodaran, a finance professor at New York University, who used a database of financial information for 5,928 public companies. He derived the effective tax rate for each industrial sector by dividing the aggregate reported net income by the aggregate taxable income.

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You should read this article…

January 25, 2011
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January 24, 2011 Sixteen Cents: Pushing the Unstable Limits of Monetary Policy

John P. Hussman, Ph.D.

Because the size of the monetary base has become so extreme relative to historical norms, the likely price pressures in response to even modestly higher short-term interest rates are equally extreme. For example, given the present level of the monetary base, an exogenous increase in short-term Treasury yields to even 1% would imply a GDP deflator of about 1.59, which is about 42.9% higher than present levels. In order to counter such pressure, the Fed would have to contract the monetary base by about $600 billion, from the present level of about $2 trillion to a still bloated but less extreme $1.4 trillion.

A larger increase in Treasury bill yields to 4% would imply a GDP deflator of about 2.35, which is more than double the current price level. The implication is that any normalization of interest rates would need to be accompanied by a massive contraction of the Fed’s balance sheet in order to avoid inflation, otherwise the collapse in liquidity preference (resulting from the higher interest rates compared to zero interest on base money) would trigger a collapse in the purchasing power of cash.

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helpful hints….

January 24, 2011
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Guest Blogger:
Bill Conerly, Ph.D.
Businomics Blog
Conerly Consulting, LLC
11 Business Challenges in 2011: Setting Prices in the Economic Recovery Pricing

Pricing is never easy, and very few companies do it well. (I mentioned this challenge last month in a post about a new book on pricing.) The economic recovery presents some “interesting” pricing challenges to many companies. Interesting in the same way that a doctor is challenged by an unusual illness.
Business is still soft in many areas of the economy, which normally dictates keeping prices low. If you’ve been discounting, you’d continue that practice.
However, some costs are rising. Certainly there isn’t much inflation in labor costs, and real estate costs (as we mentioned elsewhere in this series) have not yet begun to rise. Interest expense is very low (either because financially healthy firms are offered low rates, or because not-healthy firms cannot borrow at all). Despite this calm in many markets, commodity prices are definitely heating up. Raw materials prices have been rising at double-digit rates for the past year.
For example, gasoline and diesel fuel prices have risen significantly, which adds costs to all businesses doing deliveries. Metals prices have also risen at an even faster pace. This squeezes the company that is buying materials in a hot market, but selling products in a chilly market.
What do you do if you are squeezed? Here’s the basic primer on price hikes in response to cost increases.
1. Does your industry still have lots of excess capacity? If so, it will be harder to pass hikes on to customers (though not impossible). This is a smaller factor with capital intensive industries, where operating costs are less important.
2. Do your competitors face the same cost increase? Surprisingly, that’s not always the case. I can buy a coat hanger made metal, plastic, or wood. Each of those materials has somewhat different cost trends. If most of my competitors are making wire hangers, and thus have avoided the cost increase I had for plastic resin, then I’m in a world of hurt. It’s easiest to raise prices when the competition feels the same cost trends or worse.
3. Do your competitors use the material as much as you do? For example, consider airlines passing on fuel costs to passengers. An airline with older, gas-guzzler airplanes has a hard time passing on higher costs if its main competitor has newer, more fuel-efficient airplanes.
4. How will your competitors react if you raise prices? If you think they’ll follow your lead, then it’s easy to raise prices. If, however, they’ll stick to their old prices and gain market share, then raising prices will be more difficult. One way for a small competitor to manage price increases is to wait for a larger competitor to raise prices, then follow their lead immediately. Do not dither, do not discuss. Have a plan in place ready to implement as soon as a major producer acts.
Managing prices is a difficult business. As with most difficult challenges, planning ahead is wise. If you are going to hold your prices steady today, what’s your plan for tomorrow? At what cost increase will you want to raise your prices? Or more easily decided, at what cost increase will you want to sit down to discuss a price change? Set a trigger point now, The worst thing you can do is to wait until you see the quarterly financials, then ask an analyst to dig down to the source of an increase in operating expenses, then learn that a key price changed two months ago. Keep on top of prices. In fact, they should be on the early warning system that you set up for economic contingency planning.

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Did you know??

January 21, 2011
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Thursday, January 20, 2011

We Should Take More Pride in Our Manufacturing Dominance; We Still Make LOTS of Stuff Here

There are frequent claims that “nothing is made in America anymore,” because all of the manufacturing jobs and production have been outsourced to places like China, Mexico, and Korea (for example, Donald Trump makes that claim, as Don Boudreaux points out here). Such claims about U.S. manufacturing have been circulating so persistently and for so long, that most people now blindly accept these myths, even though the empirical evidence provides a completely different story—a thriving and growing U.S. manufacturing sector. (For example, see yesterday’s front page WSJ article about manufacturing being the “shining star of this recovery.”)

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January 21, 2011
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Orkla sells Elkem to China National Bluestar

Orkla ASA has signed a binding agreement with China National Bluestar (Group) Co., Ltd (Bluestar) for the purchase and sale of Elkem. The transaction comprises Elkem Silicon Materials, Elkem Foundry Products, Elkem Carbon and Elkem Solar. According to the agreement, the sales price is USD 2 billion for Elkem before closing- and capital structure adjustments. The agreement includes the 1.5 TWh/year power contract Orkla acquired last year which will ensure that Elkem’s smelting plants in Norway will have a secure and long-term competitive power base. Orkla will remain the owner of the shares in Elkem Energi AS, including its 85 % stake in AS Saudefaldene.

A press conference will be held at Orkla`s head office at Skøyen in Oslo, today at 10.00 CET. The press conference will be webcasted:

Bluestar is a leading China-based international chemicals and new materials company, with 2010 sales in excess of USD 6 billion and Head Office in Beijing. The company is 80%-owned by the Chinese state-owned company ChemChina, with the remaining 20 % owned by the US private equity firm Blackstone Group. Since 2006 Bluestar has performed a number of international acquisitions, including Adisseo and Rhodia’s Silicones business in France, and the Australian company Qenos.

Elkem will become an important part of Bluestar’s operations going forward. With this transaction Bluestar will strengthen its competitiveness in the silicone industry and broaden its footprint in adjacent markets. All of Elkem’s business areas and technologies are important for supporting the booming Chinese economy and will help the country in reaching its global climate targets. Elkem Solar’s technology for the highly energy-efficient and environment-friendly production of solar-grade silicon reduces the risk of emitting environmentally damaging substances and enjoys a significantly lower energy consumption than traditional technologies. Elkem is in a worldwide leading position in this new technology.

“It is important to secure that Elkem has a new owner able to further develop its potential and keep its competence and resources united. In Bluestar, Elkem will have an owner that has solid financial capacity and is well positioned in the world’s largest market for metals and renewables. Bluestar has the best attributes to take advantage of the potential of Elkem’s technological strength and competence”, states Bjørn M. Wiggen, President and CEO of Orkla ASA.”

Helge Aasen, CEO of Elkem, comments as follows: “China is or will be the biggest and highest-growth market for silicon metal, foundry products, solar-grade silicon and other products offered by Elkem. I believe that by joining forces with Bluestar Elkem will have a strong platform for promoting its technological leadership and securing a prosperous development going forward. For Elkem, with Bluestar as our new owner, we will achieve one of our main targets, namely a stronger presence in Asia in general and in China in particular. This will strengthen the position of our plants, both in Norway and in the rest of the world. In addition, Elkem will also have the opportunity to take a leading role in the upgrading and further development of Bluestar’s silicon-related operations, especially in China. We look forward to working with our new colleagues from Bluestar. ”

Mr Ren Jianxin, President of Chemchina and Chairman of Bluestar, sees strong potential for a combined Elkem-Bluestar organisation:

“Elkem will play an active role in promoting the international and technological management of Bluestar’s business, further expanding Bluestar’s silicone industry chain and improving its global competitiveness.. Combining Bluestar with Elkem will be of great benefit to both companies: For Elkem, its access to Asia, and especially China will be significantly enhanced going forward, which is a real advantage given the size and growth of China and Asia for most of Elkem’s products. For Bluestar, the combination with Elkem will give them access to Elkem’s excellent management experience and industry-leading technological know-how. We strongly believe in the huge potential for Elkem’s new solar-grade technology with its leading energy efficiency and environmental safety characteristics. I am welcoming Elkem into the Bluestar family as I am convinced that our diversity in terms of management background and technology, industry experience, culture and regional footprint will be the source of our combined strength.

The transaction will not involve significant changes to Elkem’s main structure or to the operation of its existing plants. Completion of the transaction is subject to the approval by certain Chinese and competition authorities, as well as the approval by the Norwegian authorities. Completion is expected during the 1st half of 2011.

Bluestar was assisted by The Royal Bank of Scotland as financial advisor, and Selmer and Skadden as legal advisors. Orkla was assisted by Moelis & Company as financial advisor and Thommessen as legal advisor.

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Bad time to be investing in wind or solar, but good for Steel Foundries tied to natural gas…

January 21, 2011
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Peter Foster January 20, 2011 – 10:39 pm

Shale gas supplies may last 250 years and make renewables uneconomic

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The bearer this week of the bad news if you’re a climate bureaucrat — but good news if you’re a consumer — was the IEA’s chief economist, Fatih Birol. Dr. Birol noted sadly that shale gas was about to pull the rug from under renewables. The IEA now estimates that shale supplies — which have half the emissions of coal — could last for 250 years.

Dr. Birol suggested that the U.S. shale gas boom had already contributed to a sharp drop in U.S. renewable investment, but the wind and solar fandango was already imploding. According to Dr. Birol, “There will be strong debates between energy and climate and finance ministries round the world about whether investment should continue to support renewables when the situation on gas has so radically changed.” But while such ponderous debates take place, the market will be moving at the speed of profit-oriented thought, and catching on to the fact that aligning with renewable policies is looking dumber by the second.

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Reshoring and emerging growth will be an opportunity….

January 19, 2011
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5 Strategies for Growing as a Domestic Manufacturer

By: Derek Singleton

Derek Singleton

ERP Market Analyst at Software Advice Derek recently graduated from Occidental College with a degree in political science. He writes about various topics related to ERP software and covers the manufacturing, distribution, and supply chain management software markets. In his spare time he enjoys training in boxing and martial arts.

ERP Market Analyst, Software Advice
on 1/7/2011

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More manufacturers are bringing production back to North America. We think the three main drivers of this trend are:

  • Increases in the cost of ocean freight transportation, which has increased by as much as 150% since the 2008 lows;
  • Longer product delivery cycles that make domestic manufacturers less responsive to consumer demand; and,
  • Poor production quality standards that have resulted in the delivery of defective goods.

An area of potential for US manufacturing lies in industrial manufacturing. The US still enjoys a competitive advantage in manufacturing machinery such as earth moving equipment, drilling and mining equipment, and high technology. As developing countries seek to industrialize, these products will be in high demand. Domestic manufacturers should exploit this competitive advantage while it is still present.

In 2010, United Technologies, which makes everything from air conditioners to airplane engines, has seized the opportunity to sell products into markets undergoing rapid urbanization. This year, United Technologies reported that their new equipment orders from China increased 15%. Today, a full 60% of their revenue comes from foreign sales. As developing nations urbanize, there is real opportunity for sales growth.

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Regulatory burden going up.

January 17, 2011
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Mandel on Innovation and Growth

The Age of Regulation Started Ten Years Ago

Posted in regulation by Mike Mandel on November 17, 2010

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Gas price trend down or u shaped?

January 17, 2011
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Friday, January 07, 2011

Update on the “Stupidest Man Alive” Kerfuffle; We’ll Never Run Out of the Ultimate Resource

The significant downward trend in real gas prices over the last century seems to generally support Julian Simon’s cornucopian view that the human resources of innovation, discovery, and substitution will always be strong enough to overcome and offset increases in population and the accompanying rising demand for natural resources like oil and gas, which will be reflected in stable or falling real prices of natural resources over time, e.g. gasoline since 1919.

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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.