Royal Dutch Shell (NYSE: RDS-B ) is working with Caterpillar (NYSE: CAT ) to test using liquified natural gas (LNG) on mining trucks in the Canadian oil sands. That's interesting, but Alpha Coal West has been there and done that—it's switching its entire heavy truck fleet to LNG. Look for the diesel-to-natural gas shift to accelerate from here and for profit margins to improve.
Just about every mining company is in cost reduction mode because commodity prices around the world have been generally weak. That includes everything from curtailing development of new mines to Teck Resources (NYSE: TCK ) starting to shut the engines on newer trucks when they aren't being used. According to the diversified miner, the wear and tear from restarting older equipment increased maintenance costs, but newer equipment can handle it. That sounds like it wouldn't be too helpful, but Teck estimates the shut downs reduce fuel consumption by 8%.
Extrapolate that across an entire truck fleet and you're talking about big savings for a miner like Teck. Now imagine how happy a company using lots of heavy trucks would be to save up to 40% on fuel. That's exactly what United Parcel Service (NYSE: UPS ) expects as it moves forward with its purchase of 1,000 LNG powered long-haul trucks.
UPS has been testing LNG vehicles for a few years, but didn't believe the technology was ready for large scale deployment. Two main problems existed: getting the vehicles the power they needed for heavy lifting over long distances and having a reliable fueling infrastructure in place. But, according to Steve Leffin, UPS' Director of Global Sustainability, "In 2012, liquefied natural gas (LNG) vehicles finally became a viable option worthy of broad-scale deployment"
Everyone's doing it
That helps explain why CSX (NYSE: CSX ) is teaming up with General Electric (NYSE: GE ) to test out LNG conversion kits for trains and why Caterpillar and Shell are working on LNG for mining trucks in the oil sands. Helping this process along is actually a duel benefit for Shell, since it happens to be one of the largest natural gas players in the world. However, these players may be late to the game. GFS Corp., a private company, has already been working on both concepts.
In fact, on the mining front, Alpha Coal West is done testing GFS' conversion kits and wants to switch its truck fleet over to LNG. Even if the savings are just half of the 40% figure UPS has touted, it beats the pants off of the 8% savings Teck is getting from shutting trucks during stops.
GFS basically scored the first win in the mining truck conversion space, which could make it both an industry leader and an acquisition candidate for a company like, who knows, GE or Caterpillar which are only just starting to test their own systems out. But the big winners, really, will be the customers.
Savings for miners
And those kinds of saving will be incredibly important to miners, particularly in hard hit coal, so look for others to follow Alpha Coal West's lead. And if Shell's efforts in the oil sands bear fruit, the transition could really start to reach critical mass. Of course, that would also help Shell extract more value from its U.S. natural gas assets, which, in hindsight, it paid too dearly for.
That said, the big cost savings are probably behind most miners when it comes to current equipment. So expect only incremental improvements from here until LNG conversion starts to catch on. But when it does you could see another round of margin improvement in the mining industry. You should keep an eye on this issue, it will be worth watching.
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