Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United States
Chemicals and primary metals industries to benefit most from the low energy costs
Could cheap energy increase foreign direct investments to the U.S.?:
▶ The competitive edge provided by a cheap energy supply and a growing U.S. market (at least from a demographic point of view) would represent potent incentives for investment from overseas companies, which may be plagued with lackluster or even contracting domestic markets and structural impediments darkening their prospects. For example, Japanese companies that are grappling with a declining domestic environment, mounting energy costs and ongoing appreciation of the Yen/USD, could see several reasons which would favor the location of new or additional industrial capacities in the U.S. These include proximity to growth driver markets and to raw materials, ease of logistics, and lower costs of energy and labor. The protracted economic doldrums in Europe may also prompt local manufacturing players there to consider increasing their U.S. presence. These competitive advantages may be emerging even now. The U.S. has already regained traction in foreign direct investment in manufacturing since the recession (US $100 billion in 2011), and is on the path to reach the pre-recession peaks.
▶ The U.S. shale gas supply is a game-changing fac- tor for American industries all across the board, as manufacturers may now: > access lower energy prices as many electric power suppliers have been shifting their coal-fired plants to gas-fired plants; > switch their energy supply from oil to gas; and > switch their feedstock supply from oil to gas. These developments will help reinforce the ongoing improvement of the competitive position of U.S. manufacturers, especially in comparison to European and Japanese counterparts. Beyond the strengthe- ning of operating profitability, the foreseeable out- come of this growing competitive edge is that U.S. manufacturers will regain ground in global trade, expanding exports and putting downward pressure on imports. The sector which is first in line to take advantage of cheaper energy is chemicals, especially basic chemicals and fertilizers, since these industries will benefit from both cheaper energy and cheaper feedstock supplies. This competitive advantage is likely to filter to downstream sectors such as agri- culture, coatings, manufacturing, paint, and plastics. Considering the size of the trade and the characte- ristics of the sector, the primary metals industry could also be a significant winner, improving its competi- tive advantage and gaining global market share. In the short/intermediate run, these trends may also fuel substantial investments in these sectors to keep pace with probable production increases. Players in the chemicals sector have already planned to invest $16 billion in the next five years.▣
H. Top sectors benefitting from a decrease in energy prices Part of energy Manufacturing
Nonmetallic mineral products Paper products Primary metals Wood products Chemicals
5%
Textile mills and textile product mills Plastics and rubber products
Food/beverage and tobacco products Apparel/leather and allied products
3%
11% 10% 8% 5%
22% 4% 3% 3% 3%
6%
12% 16% 2%
201.8* 1% 3%
18% ~0%
* $108.7Bn and $149.2Bn excluding pharmaceuticals Source: Bureau of Economic Analysis – International Trade Administration
24
17.7 21.9
103.5 11.3
197.1* 24.4 40.2 67.9
116.4
10.7 25.7 76.5 5.9
12.6 29.1 66.7 9.0
Part in U.S. input costs (%)
costs in sector manufacturing energy ($Bn) input cost (%)