Shale spurs manufacturing

Cheaper natural gas is boosting the American economy, especially manufacturing, write analysts HAROLD L. SIRKIN and MICHAEL ZINSER

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The obituary for U.S. manufacturing has been written many times. But as Mark Twain famously informed the New York Journal after various newspapers had reported that he was dead or dying, reports of manufacturing’s demise have been greatly exaggerated.

In fact, U.S. manufacturing is on the rebound. And the shale gas energy boom is accelerating the progress, benefiting nearly every manufacturing sector, as well as U.S. consumers and workers, who will reap the benefit of as many as 5 million new manufacturing and service jobs by the end of this decade.

U.S. manufacturing competitiveness has been improving for some time due to U.S. workers’ higher productivity, America’s competitive labor costs and the flexibility U.S. manufacturers enjoy on the factory floor.

As a result of these factors, labor costs that, on average, were modestly lower in the United States than in other developed economies a decade ago are now approaching 16 percent to 35 percent lower on average. At the same time, U.S. factories also have been gaining against China, where wages and benefits have been increasing some 15 percent to 20 percent per year.

What’s new is the added cost advantage the United States now enjoys as a result of our well-developed shale-gas and oil industry, which has given U.S.-based manufacturers unprecedented access to abundant, cheap natural gas.

According to research the Boston Consulting Group has conducted as part of our ongoing “Made in America, Again” series, natural gas prices in other major economies are currently two-and-a-half to four times higher than U.S. natural gas prices. Since natural gas increasingly is used to fuel U.S. power plants and most manufacturers are heavily reliant on electric power, the comparatively low price of industrial electricity is giving U.S. factories an additional advantage over other major exporting nations, including China, France, Germany, Italy and Japan.

Since it will take years for these countries to develop their shale-gas industries, this U.S. cost advantage will likely last at least five to 10 years — possibly longer. Several European countries, for example, including France, have banned hydraulic fracturing, or “fracking,” the technology used to extract gas and oil from shale. And China, while reportedly sitting on huge shale gas deposits, still lacks the technology to properly exploit its resources.

Manufacturing decisions, like many others, are driven by economics. So the good news is: Due to lower natural gas prices, lower electricity prices and competitive labor prices, it is cheaper to manufacture many products in the United States than in Western Europe, Japan and, when the added cost of a longer supply chain is included, even China.

Some U.S. industries, such as the petrochemical industry and fertilizer manufacturers — whose products are created from natural gas “feedstocks” — are benefiting directly from the gas boom. Petrochemical ethylene, used in a wide variety of products, ranging from PVC pipe and plastic bottles to antifreeze and detergents, already is about half the price to produce in the United States than in China and Western Europe.

The natural gas cost advantage also is benefiting other manufacturers, particularly industries that use a lot of energy in the manufacturing process, such as glass and steel. Even in non-energy-intensive industries, cheap natural gas will shave 1 percent to 2 percent off U.S. manufacturing costs due to the lower cost of electricity.

Companies from all over the world — Canada, France, Russia, South Africa, Taiwan and elsewhere — know a good thing when they see it and are opening new factories or expanding existing manufacturing operations in the United States. Thousands of construction and full-time factory jobs are being created. More will likely follow.

The U.S. manufacturing rebound is real. In fact, it’s gaining speed and momentum. While the corresponding increase in jobs is coming slowly, it is coming nonetheless, and our future will benefit enormously from it.

Harold Sirkin is a senior partner and Michael Zinser is a partner in the Chicago office of The Boston Consulting Group. They are co-authors, with Justin Rose, of “The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback.”


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