CUBANET ... CUBANEWS

April 18, 2001



Sherritt: from Fidel Castro to King Coal?

Peter Foster, National Post. April 18, 2001

Ian Delaney, the head of Sherritt International Corporation, appears attracted to both political and business dinosaurs. First he threw in his lot with Tyrannosaurus Fidel Castro, declaring that Sherritt would become the "CP of Cuba." In 1996, he raised $675-million via a debenture issue to invest in the island, but has found profitable investments hard to locate in the tropical gulag.

Frustrated by Cuba, Mr. Delaney -- in concert with the Ontario Teachers' Pension Plan Board -- has turned his attention to another apparent dinosaur: coal. In February, Sherritt and the Ontario Teachers' made a hostile bid for the outstanding units of the Luscar Coal Income Fund, which controls the largest coal company in Canada. However, Luscar's rough courtship, like the Cuban fandango, has been filled with frustrations.

The Sherritt bid of $3.50 per Luscar unit expired at seven o'clock last night, but with the units trading recently above $4 in anticipation of a higher bid, anybody who tendered would need his head examined. Potential white knights, however, have yet to appear on the horizon. Luscar, meanwhile, has not allowed Sherritt into its data room, demanding that it make a more attractive bid to gain access. Luscar has accused Sherritt of attempting to steal the company. Sherritt has claimed that its offer is a good one.

How this all plays out is a matter of conjecture, but one certainty is that the outlook for coal -- or at least thermal coal, which is used to generate electricity -- has improved considerably in North America in the past year.

When Alberta Premier Ralph Klein met with Prime Minister Jean Chrétien a couple of weeks ago, he reportedly brought up the issue of expediting environmental approvals for a number of new coal-fired power stations (Most of Edmonton-based Luscar's output goes to domestic power generators). Mr. Klein's deregulation of provincial electricity markets has -- as with California, although to a much smaller extent -- been undermined by a combination of poor market design and a surge in natural gas prices.

Increasingly in recent years, and primarily for environmental reasons, natural gas has been the fuel of choice for new power plants. Coal has long been demonized by the environmental movement, which could, perhaps, never forgive it for kick-starting the Industrial Revolution. Coal was the object of one of the movement's first great campaign successes, the battle against "acid rain." As a result of the 1990 Clean Air Act amendments, U.S. industry spent some US$15-billion to cut sulphur dioxide emissions. However, coal's long-term future appeared to be sunk when man-made global warming came on the scene, because its carbon dioxide emissions are considerably higher than those of natural gas (Significantly, in California, epicentre of U.S. environmentalism, coal accounts for only 1% of generating capacity, versus more than 50% for the United States as a whole).

Coal still accounts for around one-quarter of primary global energy demand, and will remain a major component for many years. However, the increase in demand over the next twenty years is overwhelmingly projected to come from China and India, both of which have large coal reserves and enormous pent-up demand for electricity (and neither of which would have been subject to restrictions under Kyoto). Between them, according to the International Energy Agency, these two countries are projected to contribute over two-thirds of the increase in world demand up to 2020. Nevertheless, coal is in relative secular decline as an energy source, particularly in the developed countries. As people grow richer, they not only demand more energy, they also demand cleaner energy, and are prepared to pay for it. This is a market trend which, ironically, is only reckoned to have slowed in recent decades because of government meddling. In North America, governments have been far from consistent in their treatment of coal. On the one hand they have, in some cases, created overstringent environmental regulations -- such as those in California -- which have helped bring the state to the point of crisis. On the other, they have sometimes subsidized coal production -- as with Quintette in B.C. and Devco in Cape Breton -- with predictably disastrous results.

There remains a role for sensible environmental regulation, but given the natural gas shortage and the likely delay before major new supplies are available from the Far North, coal could have a valuable intermediate role in easing North American energy problems, particularly given the development of cleaner-burning technologies, which will eventually find a powerful market in the developing economies.

Whether Sherritt's Ian Delaney has a significant role to play in the North American coal scene is yet to be decided. If he does, he likely will find King Coal a more reliable partner than T. Rex Fidel.

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