Last updateFri, 19 Apr 2019 3pm



Goodbye, Nukes?

Germany, in response to the Fukushima disaster, is taking steps to get completely out of nuclear power over the next 11 years, shutting down all the 17 nuclear plants in the country by 2022. Italy did this earlier, following the 1986 Chernobyl disaster. And Switzerland has announced similar, if slower plans. Germany plans to replace the lost nuclear energy with renewables, which may or may not be feasible. Japan is struggling with power shortages now, due to the loss of output from Fukushima; these may be exacerbated in the future, as the Chubu Electric Power Co. has agreed to shut down its Hamaoka plant, hundreds of miles from Fukushima, until improved tsunami protection can be put in place.

Yet nuclear is not dead everywhere. In a May 29 CNN interview Tony Pietrangelo, vice president and chief nuclear officer of the Nuclear Energy Institute, pointed out that construction is still going on in the United States, China, India and elsewhere, and pointed out that in the U.S. renewables constitute just a small percentage of capacity and will not be suitable for base load any time soon — if ever. Yet a build-out in renewables may constitute an opportunity for U.S. manufacturers — valve makers included.

Meanwhile China is experiencing power shortages caused by steep increases in the price of coal and governmental restrictions on electricity prices — shortages that are beginning to affect manufacturing. Some of this may be reflected in recent Department of Commerce figures, which show U.S. exports climbing rapidly and reaching $175.6 billion in April.

It should be interesting, to say the least, to see how this also plays out.


Is Just-in-Time Too Risky?


Just-in-time (JIT) has been a guiding principle in manufacturing for some decades. Ideally, a company should have no (or as little as possible) in-process inventory, because inventory is waste. Prior to JIT many companies kept some inventory as a cushion against supply disruptions. The loss of this safety net, the theory went, would force all parts of the supply chain to adopt best practices, to the benefit of all. I once heard a management speaker say that JIT is not really about reduction in inventory costs, it’s about no place to hide.

All that is very nice, but many companies around the world that depend on a steady supply of critical goods from Japan have discovered that it’s difficult to apply modern production management techniques to earthquakes and tsunamis. Natural disasters have severely disrupted the supply of materials and parts available only from Japan, forcing production cutbacks for U.S. companies. An article in The Economist entitled “Broken Links” suggested that manufacturers may be reversing some of the JIT gospel and learning to keep some inventory of critical supplies on hand. This was echoed by a March 31 story by Joe McDonald of AP entitled “Disruption of parts supplies after Japan quake stirs unease about 'just in time' production”.

There was a column in the San Francisco Chronicle on Sunday, May 22 that I heartily recommend. It’s entitled “Outsourcing manufacturing hurts U.S.” Written by Henry R. Nothhaft, entrepreneur and author, with David Kline, of the new book Great Again: Revitalizing America's Entrepreneurial Leadership, the article points out that the whole outsourcing philosophy — keep innovation here but move production to low-wage countries — is ultimately self-defeating. Where production goes, innovation follows, leading to an economy without a foundation of true wealth creation. And it has already led to a reluctance of venture capitalists to invest in startups here in the U.S.

But American manufacturers may have seen the light. While certain critical raw materials are available only overseas, steady increases in wages in China and other developing countries, along with changes in the value of the yuan, have made overseas production less attractive. Another article in The Economist entitled “Moving back to America: The dwindling allure of building factories offshore” talks about “the new economics of labour arbitrage,” and mentions that not having a long supply chain from an overseas supplier may even allow for a reduction of in-process (just-in-case) inventory.

So perhaps we’ll come full circle after all.


Energy Legislation: An Update

Battles have been going on within the federal and various state governments on what to do about energy. With oil at between $100 and $110 a barrel, instability in the Middle East, and the nuclear disaster in Japan—while the threat of climate change remains a concern—U.S. politicians are looking at ways to cope. Some want to increase domestic production of oil as fast as possible, and condemn the restrictions on deep water drilling that followed the Gulf oil spill. Others want to greatly increase natural gas production, and look to shift as much as possible of electricity production and transportation to that. Some shout that nuclear energy has shown itself to be a trap, while others insist that a disaster similar to Japan’s is unlikely here, and that, because nuclear energy produces no greenhouse gases, more nuclear generating stations should be built. This is seen as especially urgent in places like the Southeast, where the primary fuel for electric generation has long been coal; there are still people betting on clean coal and carbon capture and sequestration. And the California legislature just passed a bill that would require that one third of the state’s electricity must come from renewable sources—solar, wind and the like—by 2025. The state has had a 20% renewables mandate in place for some years, so this just extends it.

President Obama seems to be embracing several of these options. On March 30 he announced the outlines of a plan to reduce U.S. oil imports by a third in 14 years through a combination of more domestic production, support for increased use of natural gas as a transportation fuel, an acceleration in the increase in vehicular fuel efficiency standards, more use of nuclear energy, and more domestic oil production — in short, an “all of the above” strategy.

Meanwhile, the Houston Chronicle reports that the increase in natural gas supplies are boosting the petrochemical industry along the Gulf Coast.

So things may be looking up — provided the economy stays on track, and provided the government finds a way to pay for any increased incentives it comes up with. Stay tuned.


Floods Impact on Natural Gas

How much damage will the flooding Mississippi do to Louisiana refineries? Brian Milne, refined fuels editor at Tenet DTN, is widely quoted as saying that 13% of U.S. refining capacity (11 refineries) may be affected. While a flood probably won’t do as much damage — or take as long to recover from — as Hurricane Katrina, it may still affect retail gasoline prices. And it may do enough damage to give valve repair companies at least a small boost.

But in the long term, the continuing high retail price for gasoline and diesel — and the high price for crude — makes one wonder about the viability of the Pickens Plan, which aims to reduce U.S. dependence on imported petroleum by substituting compressed natural gas for diesel in trucks and buses. The plan envisions building large numbers of power-generating wind turbines to free up natural gas currently used for electricity generation. Plan originator T. Boone Pickens is optimistic that a key element of it will soon receive federal approval: On April 14 CNBC reported that, with the increasing price of crude Pickens feels that the president would surely sign it.

With the development of gas shale deposits there’s is a lot of natural gas available these days, and likely to be more. I recently interviewed Travis Davies of the Canadian Association of Petroleum Producers, who told me that the increased supply has moved North America away from looking for ways to import the stuff to ways to export it. There’s so much of it, in fact, that it’s depressing gas development in Canada, just because the price is so low. Any effect on the price of crude, however, seems to be pretty far in the future.


High Oil Prices Can Help

In a recent blog I reported that profits at Halliburton and Schlumberger were up. Not surprisingly, the major oil companies have also reported increased profits. The Washington Post on April 28 reported that Exxon Mobil had a first-quarter profit of $10.7 billion, 69% more than the same period last year. Royal Dutch Shell was up 30%, to $6.3 billion, excluding one-time items and inventory gains. Chevron hit $6.2 billion. Only BP was below last year. This news has, predictably, led to calls for the repeal of oil-company tax breaks. Exxon Mobil issued a statement in self defense, saying that they were not responsible for high gasoline prices, and that high oil company profits helped buoy stock prices, to the benefit of retirement funds and other investors. And National Association of Manufacturers President and CEO Jay Timmons issued a statement saying President Obama’s call for increased taxes on oil companies would increase prices for manufacturers as well as everybody else and contribute to inflation.

Whether or not you believe that the oil companies are making too much profit (in some circles the word “profit” seems to be used almost as an expletive), there’s no denying that high crude prices are driving increased exploration and capital expenditures; Exxon Mobil, for example, increased capital and exploration expenditures by 14%, to $7.8 billion.

So maybe the high oil prices aren’t all bad. Certainly any efforts to increase supply in the face of increased demand have to be good news for suppliers to the O&G industry.

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