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Why Raw material Substitution can harm producers


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The evolution of technologies, high prices, new regulations or high risks on supplies threatens the position of certain raw materials to substitutions.

The substitution of one material for another industry takes many forms and can have a significant impact, on both the market and involved companies, said the research firm EY in a recent study on 'super cycle' for mining and oil companies. 'The super cycle was unprecedented in both its scale and its duration. This singularity has planted the seeds for the next disturbance mode business' explains Bob Stall, responsible mining and metals of EY in the United States. In this changing context, the companies concerned must respond quickly. 'We all think we have time to react when the time comes. But it's like a ball, you are hit before hearing it' warns the head of mining and metals research consultant, Mike Elliott.

The most striking example was the rise of shale gas on the U.S. market. Thermal coal, which provided 50% of electricity production in the country in 2002 - while the natural gas generated 18% - do not produce more than a third ten years later, while the share of gas had jumped to 30%. The collapse in natural gas prices caused by the emergence of shale gas had heavily driven electricity producers to abandon coal. This trend was amplified by state guidelines to limit greenhouse gas emissions as well as the use of new technologies such as fracturing and horizontal drilling. Having closed fifty mines in two years, coal producers have diversified into metallurgical coal and natural gas.

Finding no more opportunities in the United States, thermal coal has been massively exported to Asia and Europe. In the latter area, it has roughly competed natural gas, more expensive, despite environmental concerns shown by the authorities. Given the influx of additional volumes, US gas producers are looking to export their products in liquefied form to Europe. These exports should balance the gas prices, increasing in North America and decreasing in the world. In the long term, China, which has very large reserves of shale gas is expected to increase the share of gas in its energy mix. The State intervenes again limiting coal consumption at 4 billion tons per year in 2015.

Substitutions in metals

Other important movements of replacing a metal by another are underway. In the automotive industry, it is still a necessity to reduce emissions and fuel consumption, which promote the use of aluminum in the United States. If in other countries, lower vehicle weight through the increasing use of high strength steels, in the United States it is the use of lightweight metal that is favored. Other materials such as magnesium, carbon fiber and other composite materials also come in the manufacture of new vehicles. Undergoing low prices as a result of overproduction in relation to demand, aluminum companies have identified the automotive industry as a development factor.

With strong demand and limited by the depletion of ore mined and the huge investment costs necessary to open new mine supply, copper is the base metal which prices are furthest from its costs production. Using industries have therefore tried to reduce their need for red metal, decreasing from 400 000 to 500 000 tons per year consumption, EY says. The use of graphene (often alloyed with copper) for electronic connections , aluminum for air conditioners and other appliances producing hot or cold , are growing rapidly. If copper is still unopposed in half of its applications, its price increased to more than double to triple that of aluminum, making it vulnerable in many applications.

The use of nickel pig iron in China has significantly reduced instead of nickel, plunging its course, while new production complexes arrive at the operational stage. Significantly more expensive than palladium, platinum was impeded in favor of that of the other PGM in the manufacture of catalysis for automotive use. The gradual substitution tends to support the price of palladium and depress those of platinum. In rare earths, awareness of dependence vis-à-vis China has encouraged users to seek alternatives. Faced with soaring prices General Motors has managed to severely restrict the use of dysprosium in the manufacture of batteries for its Volt. More radical, Toyota will use samarium-cobalt magnets to replace dysprosium – neodymium magnets.

The super cycle led for a long time a “scarcity bonus' relative to certain metals, sufficiently large to encourage industrial users to find alternatives “Smart companies actively ensure the risk of substitution and implemented adaptive strategies to manage these risks' says Christian Mion, partner at EY, responsible of mining in the Europe, Middle East, India, Africa. The most vulnerable companies are those that depend on a single product or which profits are too tied to a single subject.

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