From: Robert Berman [mailto:bermaneconomics@gmail.com]  

Sent: Monday, November 07, 2011 12:35 PM

To: Hirsch, Bruce R

Cc: 'Robert Berman'; Steve Nadel; Robin Roy; Eric Peterson; Jerry Schoen; Maxine Savitz; Michael

Hyland; Raymond Polinski; Mahesh P. Sampat; Thomas Petrosino; James Lass; Chris Brown; Aaron

Meyers; Jerry Corkran; Tim Ballo; Jeremiah Freeman; Jim Raba; John Cymbalsky; Robert van Buskirk;

Steve Rosenstock; Daniel Young; Rick Anderson; Bob Smith; Rob Greeson; Carlos Gaytan; Art Rosenfeld;

Greg Coulter; Richard Parker; Paul Ryan; Jerry Hodge; Dan Cohen; Jennifer Tiedeman; Phil Hopkinson;

Chris Bolduc; Greg Rosenquist; Katie Coughlin; Scott Beck; Dave Millure; Ken Winder; John Rossetti; Aris

Marantan; Brian Coffey; Caitlin Johnson; Matthew Nardotti; Michael Rivest; Zhimei Luo; Charlie Stevens;

Clark Silcox; Jim Creevy; John Caskey; Meg Waltner; Bob Saint; Tom Eckman; Gary Fernstrom; Chuck

Simmons; Phil Harter; Alex Hofmann; Puesh Kumar; Andrew Delaski; Joanna Mauer; Wes Patterson;

charlie drexler; David Flaten

Subject: Re: MV Transformers Material Price Sensitivity Analysis

Competition drives the market, not capacity utilization. Capacity utilization is demand‐driven. The ‐25%

and +25% are the pricing scenarios agreed to by the group for sensitivity testing purposes. I neither

recommended nor voted on them.

Regards,

Robert A. Berman, Principal

Berman Economics

www.BermanEconomics.com

1915 Grand Court

Vienna, VA 22182

703‐281‐0490

703‐655‐8398 (cell)

BermanEconomics@gmail.com

On Nov 7, 2011, at 12:22 PM, Hirsch, Bruce R wrote:

Robert,

  

With all due respect ‐ I probably shouldn’t be debating economics with an economist but this is how I

learn!

  

When demand increases to the point where it outstrips availability, price goes up. This isn’t speculation

outside of observable experience but rather time proven cold, hard facts.

  

In the case of amorphous steel, it is obvious that Metglas bet on increased demand as a result of new

transformer efficiency standards. When the demand did not develop, at the expected levels, they were

left with excess capacity which led to a reduction in price in order to sell more product and keep their

lines running. The explanation for the decrease in cost is simply excess capacity.
  

The complication factor looking to the future is competition. Competition drives efficiency and thus

helps control costs. Thus, the availability of competition must also be factored into any future

projections. I agree with you that it is in the best interest of Metglas to expand their capacity but they

will do this cautiously and only as the market demands. The wild card is – will the other steel

manufacturers get into the amorphous steel business?? I don’t know how easy that is or if they would

entertain doing it. Again the market will drive their decision.

  

Finally, I have no idea what the profit margin is on steel prices but you seem to believe that the price of

M3 steel could be cut 25% and the manufacturers would still want to produce it. That concept

commands my interest. I would like to see your observable experience that supports that or is this

speculation?    

  

                                                                                                                                                Bruce

  

  

From: Robert Berman [mailto:bermaneconomics@gmail.com]  

Sent: Monday, November 07, 2011 10:39 AM

To: Hirsch, Bruce R

Cc: 'Robert Berman'; Steve Nadel; Robin Roy; Eric Peterson; Jerry Schoen; Maxine Savitz; Michael

Hyland; Raymond Polinski; Mahesh P. Sampat; Thomas Petrosino; James Lass; Chris Brown; Aaron

Meyers; Jerry Corkran; Tim Ballo; Jeremiah Freeman; Jim Raba; John Cymbalsky; Robert van Buskirk;

Steve Rosenstock; Daniel Young; Rick Anderson; Bob Smith; Rob Greeson; Carlos Gaytan; Art Rosenfeld;

Greg Coulter; Richard Parker; Paul Ryan; Jerry Hodge; Dan Cohen; Jennifer Tiedeman; Phil Hopkinson;

Chris Bolduc; Greg Rosenquist; Katie Coughlin; Scott Beck; Dave Millure; Ken Winder; John Rossetti; Aris

Marantan; Brian Coffey; Caitlin Johnson; Matthew Nardotti; Michael Rivest; Zhimei Luo; Charlie Stevens;

Clark Silcox; Jim Creevy; John Caskey; Meg Waltner; Bob Saint; Tom Eckman; Gary Fernstrom; Chuck

Simmons; Phil Harter; Alex Hofmann; Puesh Kumar; Andrew Delaski; Joanna Mauer; Wes Patterson;

charlie drexler; David Flaten

Subject: Re: MV Transformers Material Price Sensitivity Analysis

  

The data say otherwise, Bruce. Demand for amorphous increased after the 2007 MEPS (taking effect

1/1/2010) and the price is about 15% lower according to the DOE data. The supply curve shifted out

because of the Metglas expansion. Metglas has stated that they will increase capacity to meet whatever

need. I believe them. It's in their economic self interest to do so. That will shift the supply curve out

again. There is no data that suggests a price run‐up in amorphous. Simple supply and demand

economics does not get you to a higher amorphous price ‐‐ only speculation outside of observable

experience gets you there.

  

There is also no support in the data for your speculation on M3. I would expect the price of M3 to fall to

maintain a cost/efficiency competitiveness. The trade‐off between M3, M2 and investment in ZDMH is a

complex business decision that the steel industry must make. Currently M3 is prices about 6% below M2

based on the DOE data. Refer to Wes Patterson's 111013 Distribution of Core Steel Grade.ppt a 40%

reduction in losses was required for M3 to effectively lose the market to M2. It looks like a modest

decrease in the price of M3 would maintain the required cost/efficiency ratio. I look forward to the ‐25%

case from LBNL ‐‐ admittedly a "surgery with a buzz saw" approach, but at least it will allow some

glimpse into what might be expected under different relative prices.
Regards,

Robert A. Berman, Principal

Berman Economics

www.BermanEconomics.com

1915 Grand Court

Vienna, VA 22182

703‐281‐0490

703‐655‐8398 (cell)

BermanEconomics@gmail.com

  

On Nov 7, 2011, at 9:59 AM, Hirsch, Bruce R wrote:

Robert,

  

Any change that will drive an increased use of amorphous steel will cause the price of amorphous steel

to increase (simple supply and demand economics). Likewise if the demand for M3 decreases, we can

expect the price of M3 to fall to a point where it becomes not economical to manufacture it anymore

and suppliers abandon the market.

  

I agree that we most probably will see an increase in the price of transformers due to the need for

added amounts of materials needed to produce the higher efficiency units. Factor into that the decline

in transformer manufacturers, since some won’t chose to make the investment in the tooling required

for amorphous steel, and the learning curve “recall issues” of manufacturing a new design and the

customers will definitely see a higher cost.

  

                                                                                                                                                Bruce   

  

From: Robert Berman [mailto:bermaneconomics@gmail.com]  

Sent: Saturday, November 05, 2011 7:26 PM

To: Steve Nadel

Cc: Robert Berman; Robin Roy; Eric Peterson; Jerry Schoen; Maxine Savitz; Michael Hyland; Raymond

Polinski; Mahesh P. Sampat; Hirsch, Bruce R; Thomas Petrosino; James Lass; Chris Brown; Aaron Meyers;

Jerry Corkran; Tim Ballo; Jeremiah Freeman; Jim Raba; John Cymbalsky; Robert van Buskirk; Steve

Rosenstock; Daniel Young; Rick Anderson; Bob Smith; Rob Greeson; Carlos Gaytan; Art Rosenfeld; Greg

Coulter; Richard Parker; Paul Ryan; Jerry Hodge; Dan Cohen; Jennifer Tiedeman; Phil Hopkinson; Chris

Bolduc; Greg Rosenquist; Katie Coughlin; Scott Beck; Dave Millure; Ken Winder; John Rossetti; Aris

Marantan; Brian Coffey; Caitlin Johnson; Matthew Nardotti; Michael Rivest; Zhimei Luo; Charlie Stevens;

Clark Silcox; Jim Creevy; John Caskey; Meg Waltner; Bob Saint; Tom Eckman; Gary Fernstrom; Chuck

Simmons; Phil Harter; Alex Hofmann; Puesh Kumar; Andrew Delaski; Joanna Mauer; Wes Patterson;
charlie drexler; David Flaten

Subject: Re: MV Transformers Material Price Sensitivity Analysis

  

The ‐25% case (for M3 and M2) is particularly important. What the LBNL's assessment of material

market shares actually shows is that relative prices of GOES and SA1 are (1) tied very closely to relative

material performance at various efficiency levels; and (2) those relative prices will change, as it is highly

unlikely that a small change in minimum efficiency will result in both AK and ATI abandoning the market.

Rather the result will more likely be a lowering of the price of M3 and M2. The close relationship of

material prices to performance at various efficiency levels is underscored by how quickly the share

results went to what economists call a "corner solution".  I would anticipate that rerunning the OPS

model for M3 and M2 at a 25% lower price would significantly (1) flatten the M3 and M2 LCC  values

over the various ELs, and (2) "return" market share to the GOES materials.  

  

Stated differently, all we are observing are the LCC's and market shares if relative prices do not change ‐‐ 

if material manufacturers cease competition. The ‐25% case is expected to show this. ABB, Howard and

GE, because of their experience and knowledge of the material price/performance characteristics, could

probably provide more refined price assessments of relative price change scenarios, as could LBNL with

some experimentation. Although this analysis is probably second nature to the material suppliers,

antitrust considerations would likely preclude their participation.

  

It should be noted that the +25% price change scenario for ANY of the materials will not inform likely

changes in relative prices as the reality is that material requirements for M3 and M2 increase more than

proportional relative to SA1, as efficiency levels increase. Price increase scenarios would only artificially

increase estimated transformer costs relative to what one may reasonably expect to happen.

Transformer prices will increase, even at lower material prices, because of the additional material

requirements associated with more efficient units; not because material prices will increase. It is the

cost increase due to weight, not price, that is most relevant to determining the greatest efficiency

increase to benefit consumers, while maintaining or increasing industry competition.

Regards,

Robert A. Berman, Principal

Berman Economics

www.BermanEconomics.com

1915 Grand Court

Vienna, VA 22182

703‐281‐0490

703‐655‐8398 (cell)

BermanEconomics@gmail.com

  

On Nov 5, 2011, at 8:16 AM, Steve Nadel wrote:

  
I agree that Robin's scenario would be useful.  For now, just run with the assumptions DOE/LBL has

already made.

  

Re steel price sensitivities, I would like to stick with the ‐25% and +25% originally agreed to.  My

understanding is that steel prices are now below the base prices DOE uses, so having a lower price

sensitivity would be useful.  As for a 50% higher scenario, as Robert says, that is pure speculation.  I

don't object to such pie‐in‐the‐sky scenarios if DOE/LBL have time, but this is a much lower priority.  And

if they do have time, I'd also suggest a scenario using EIA's high electricity price forecast as many people

consider the reference case forecast to be too low (this may also be on their current list as it's a

standard sensitivity DOE usually runs).

  

Steve

>>> Robert Berman <bermaneconomics@gmail.com> 11/4/2011 7:09 PM >>>

Robin's scenario would be an easy one to run ‐‐ simply filter our the ZDMH and SA1 "dots", unless we

what to then assume that the lack of availability of amorphous and ZDMH would result in a 50% (or

more) increase in the price of M3 and M2, which might require additional runs.

Regards,

Robert A. Berman, Principal

Berman Economics

www.BermanEconomics.com

1915 Grand Court

Vienna, VA 22182

703‐281‐0490

703‐655‐8398 (cell)

BermanEconomics@gmail.com

  

On Nov 4, 2011, at 6:36 PM, Roy, Robin wrote:

Greg, Richard et al,

That sounds sensible.  I think it might also be useful to perform sensitivity analyses based on the worse‐

than‐worst‐case assumption that neither ZDMH nor amorphous are available.  That would put a floor

under the LCC savings estimates and a ceiling on the first cost impact, representing the outcome if the

amorphous and ZDMH suppliers effectively exerted extreme upward price leverage.

On a rough eyeballing of the data, it appears that for each DL, many of the ELs that M2 or M3 can

achieve would still deliver LCC savings.  If that’s right, it would give me much more comfort with those

ELs.  

Cheers,
Robin

From: Greg Coulter [mailto:greg.coulter405@gmail.com]  

Sent: Friday, November 04, 2011 3:18 PM

To: Richard Parker

Cc: Alex Hofmann; Andrew Delaski; Aris Marantan; Art Rosenfeld; Bob Saint; Bob Smith; Brian Coffey;

Caitlin Johnson; Carlos Gaytan; Caskey, John; charlie drexler; Charlie Stevens; Chris Bolduc; Chris Brown;

Clark Silcox; Creevy, Jim; Dan Cohen; Daniel Young; David Flaten; Eric Peterson; Freeman, Jeremiah; Gary

Fernstrom; Greg Rosenquist; Hirsch, Bruce R; James Lass; Jennifer Tiedeman; Jerry Corkran; Jerry Hodge;

Jerry Schoen; Jim Raba; Joanna Mauer; John Cymbalsky; John Rossetti; Katie Coughlin; Ken Winder;

Mahesh P. Sampat; Matthew Nardotti; Maxine Savitz; Waltner, Meg; Meyers, Aaron; Michael Hyland;

Michael Rivest; Millure, Dave; Phil Harter; Phil Hopkinson; Polinski, Raymond; Puesh Kumar; Rick

Anderson; Rob Greeson; Robert Berman; Robert van Buskirk; Roy, Robin; Ryan, Paul; Scott Beck;

Simmons, Chuck; Steve Nadel; Steve Rosenstock; Thomas Petrosino; Tim Ballo; Tom Eckman; Wes

Patterson; Zhimei Luo

Subject: Re: MV Transformers Material Price Sensitivity Analysis

Richard,

I have talked to many of the representatives, while not a complete survey, we are of the opinion that

the sensitivity analysis for the core materials could be simplified.  Presently, the plan as I understand it is

to run sensitivity analysis at both +25% of 2008 prices and ‐25% of 2006 prices.  Our concern is not with

the low side on these prices as due to the severe market depression over the last many years for these

products, we feel we have seen the low side.  Our concern is more on the high side, where we are more

concerned about the effect a major technology swing could have on existing core materials.

Therefore, we suggest that the sensitivity analysis only be run on the high side and that only 2 levels be

run.  We suggest that +25% and +50% of 2008 prices would satisfy our needs.  Therefore, the price levels

used for the sensitivity analysis for amorphous metal would be:

   

      $2.91 x 1.25 = $3.64

      $2.91 x 1.50 = $4.37

This range should provide enough insight.  These should only be run for the liquid filled design lines

(DL1, DL2, DL3, DL5). The rationale for using the 1.5 times 2008 levels is the concern that if Efficiency

Levels are chosen that are high enough to eliminate silicon steel from competing and amorphous

becomes the prime core material, all (the) amorphous metal producers would have upward price

leverage even above the value we are proposing to use for this analysis.  

For the dry type lines, it appears your proposal on price sensitivity is fine.

If anyone has comments or opposition, please advise.  I apologize for not talking to everyone.

Greg

    

On Fri, Nov 4, 2011 at 11:20 AM, Richard Parker <richardparkerdc@gmail.com> wrote:

Colleagues,

There have been a number of requests for additional LCC runs with various material prices reflecting

concerns with possible shortages of supply under various standards scenarios.

Attached is a sheet that summarizes the price sensitivity analysis that is currently in the pipeline: ranging

from 2006 minus 25% on the low side to 2008 plus 25% on the high side.  

For amorphous that yields a range from $1.72/lb to $3.64/lb, with a base case (2010) of 2.38/lb.  
For ZDMH, the range is from $1.41 to $3.22 with a base of 2.05.  (A sensitivity is already being run with

ZDMH screened entirely out of the analysis, reflecting concerns that this material may not be available

due to a reluctance to supply the North American market allegedly due to fear of dumping duties.)

As we discussed, each run takes several hours per design line so we obviously cannot accommodate all

requests, nor would it be instructive to do so absent some credible price scenario that is not currently

being modeled and that lies outside these boundaries.

So what I would propose is this:  Could industry participants in the MV Group please communicate with

each other today, examine the attached sheet and  

(a) try to arrive at a collective determination of whether there is reason to believe that  proposed range

of prices is really to narrow such that additional run is warranted; and

(b) if so, propose the set of prices that you would like to see run, and a short explanation/justification

for your request.

Greg Coulter has kindly agreed to serve as the coordinator for this effort so please work with him.  If for

any reason, issues of confidentiality prevent you from communicating with Greg and others in open

forum please let me know and I will discuss with you how to proceed.   

You also will need to choose a couple of design lines to focus on.  I understand that DL 1 and 2 are the

lines with the most shipments in the liquid immersed category.  If you have preferences for MVDT

please convey them with your request (perhaps DL 12?).  I would expect that we could manage runs for

3 design lines.  

Again, the consultants are swamped with work accommodating the input they've gotten from the group

so far, so please do not make work for them by requesting additional runs unless there really is good

cause for doing so.   

Please let us know by cob today what your preferences are.

All best,

Richard

‐‐  

Greg Coulter

  

  

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