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EPA’s new rules could hurt steelmakers

Keywords: Tags  Environmental Protection Agency, EPA, Gina McCarthy, power plants, pollution, greenhouse gases, climate change, American Iron and Steel Institute Thomas J. Gibson

CHICAGO — New U.S. regulations aimed at curbing pollution from power plants could drive up metals prices and the cost of goods made from metals, according to industry analysts and trade associations.

The new rules, announced June 2 by the Environmental Protection Agency, could lead to higher natural gas and electricity costs, which in turn could force metals producers and their downstream customers—including automakers—to attempt to pass higher raw materials costs on to end-users, they said.

The new regulations are also a blow to the domestic coal industry, a big consumer of steel, analysts said.

Such warnings come as the EPA looks to slash carbon emissions from existing power plants, which according to the agency are the biggest source of pollution in the United States. The EPA wants to cut carbon emissions from the power sector by 30 percent from 2005 levels, it said June 2.

"We don’t have to choose between a healthy economy and a healthy environment—our action will sharpen America’s competitive edge, spur innovation and create jobs," EPA administrator Gina McCarthy said in a statement.

But the new regulations could do just the opposite, making power more expensive and less reliable, as well as pushing jobs and emissions overseas, American Iron and Steel Institute president and chief executive officer Thomas J. Gibson said.

"When CO2 regulations are instituted in the United States, limitations must apply at the same level of stringency to other major steel-producing nations, such as China," Gibson said in a statement June 2. "Otherwise, steel production and manufacturing jobs will shift to other nations with higher rates of (greenhouse gas) emissions."

The Aluminum Association also stressed the importance of predictable, low-cost electricity for a competitive domestic industry, noting that it is reviewing the new rules and will provide the EPA with feedback.

"It means energy costs are going to go up. That’s the bottom line," Charles Bradford, principal of New York-based Metals Industry Advisory Group LLC, told AMM, adding that higher power prices could lead to higher steel tags, although that isn’t guaranteed.

"It definitely makes the U.S. steel industry less competitive. But it’s not something they can necessarily pass on to their customers because we’re not living in inflationary times," he said, also pointing to European carbon policies—and resulting higher prices—as a warning to steelmakers in the United States.

"This is one of the things killing the European steel industry. Their energy costs have gone sky high, they’re noncompetitive and they’re going to have to close some steel mills down," Bradford said. But U.S. steelmakers won’t suffer as much as their European counterparts, in part because of abundant shale gas production, he added.

The new regulations will have an impact on steel in general, which means they could impact downstream steel consumers, including the automotive sector, according to Chris Kuehl, an economist and managing director of Lawrence, Kan.-based Armada Corporate Intelligence. However, it’s too early to jump to any firm conclusions, he said.

The rules will push more power generation capacity away from coal and toward natural gas, Kuehl said, brushing aside wind and solar as bit players, which means steel and metals producers will be more reliant on historically more volatile natural gas prices, although that volatility could be muted because of shale production.

"We were developing a tidy little advantage in steel production because of cheap energy. We may still have it, but is there going to be time to transition from cheap coal to cheap gas?" Kuehl asked.

A key factor will be whether and to what extent big utilities—especially in southern states—choose to contest the new rules or seek to boost rates, and whether state utility boards approve higher rates, he said.

"If (utility boards) think there is a big enough change in how utilities make their money, they may approve some pretty hefty rate hikes," Kuehl added.

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