Resurgence in US manufacturing: Transportation and energy costs – Shale gas

August 12, 2013

There is a strong argument to be made in favor of a resurgent manufacturing sector in the US. The most important factor leading to a resurgence is shale gas, a game-changing abundant, inexpensive source of energy. (See “A homecoming for US manufacturing” for an indepth discussion.) Just recently, a report was released by the Department of Energy saying that the government should begin easing restrictions on the export of natural gas. The idea of becoming an energy exporter, rather than an importer, was unthinkable a few short years ago.

The availability of a cheap energy source domestically, and the high price of oil globally, changes the cost calculation of transporting goods for manufacturers with global supply chains. This is particularly true for companies manufacturing goods with lower value-to-weight ratios that are generally less able to absorb the higher transportation costs of manufacturing abroad and shipping to the US. We’re already seeing that some companies involved in heavy manufacturing are relocating plants to be closer to their customers. Two large manufacturers recently announced their intent to increase production in the US for goods to be sold in the North American market. We expect more companies will follow suit.

Another result of the shale gas boon in the US has been to lower the cost of production domestically, creating favorable conditions for certain manufacturers to produce in the US. In the immediate term, we see petrochemical, fuel, fertilizer, and metals companies considering or committing to new investments in the US due to more affordable energy and greater downstream demand from increased drilling. Three of these companies are opening plants in the US to take advantage of natural gas prices and/or more affordable feedstock. A major steel company has invested over $100 million in an Ohio plant to help meet demand from shale gas extraction activities.

Transportation and energy costs heavily impact supply chains. If you are a manufacturer looking to reshore back to the US, you need to coordinate with your suppliers to ensure the timely delivery of parts and materials. It could make sense for certain suppliers, particularly of essential tier-one components to also establish operations in the US. We saw this happen in the ’80’s and ’90’s, when Japanese car makers built plants here.

Questions to consider:

Does it make economic sense for you to reshore production? How will shale gas affect your supply chain in terms of cost and risk factors?

Coming next: currency trends supporting a manufacturing revival in the US

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