completion in 2013. Te company’s Keystone XL pipeline is awaiting final federal approval, although it is currently scheduled to be in service in 2015. Although the exact effects are difficult to forecast, given the unpredictability of energy prices, an expansion of pipeline infrastructure will likely result
from higher crude oil prices. Consumer demand for automo- biles can be constrained by high oil prices, which negatively impacts the long-term growth of automobile manufacturers. Chemical manufacturers would exhibit a more significant growth of 0.2 in overall riskiness, because these firms rely on
Surging energy consumption from emerging economies like China and India will particularly drive up the price of crude oil and natural gas.
in higher energy prices. Domestic gas and oil extractors will be able to export fossil fuel at international prices, lowering the excess of crude oil and natural gas in the US. Finally, envi- ronmental concerns regarding hydraulic fracturing may lead to increased government regulations, heightening extraction costs and raising energy prices. What are the implications of higher energy prices, given
the manufacturing sector’s reliance on energy? In this scenar- io, IBISWorld assesses the effects that higher-than-expected energy prices will have on the risk scores of domestic manu- facturers. An industry’s risk score includes structural risk, growth risk and sensitivity risk. Structural risk accounts for the impact of fundamental characteristics common to all in- dustries, such as international trade and competition. Growth risk measures an industry’s projected revenue growth, while sensitivity risk accounts for external factors affecting industry performance. Te risk score is measured on a scale from one to nine, where a lower risk score indicates a less risky industry. Te scenario assumes domestic natural gas and crude oil
prices will converge to world prices by 2018, representing a faster rate of growth than current EIA forecasts. In this scenario, natural gas prices are anticipated to increase 14.8% in 2014, while crude oil prices are projected to grow 4.5%. Te growth rates were applied to natural gas and crude oil prices in IBISWorld’s database, with the results shown in the following table.
Industry
Automobile Metal Stamping
Auto Steering and Suspension Mfg
Auto Engine and Parts Manufacturing
Organic Chemical Manufacturing
Petrochemical Manufacturing
2013
Baseline Risk 5.9
5.7 5.3 4.9 5.7 2013
Scenario Risk 6.0
5.8 5.4 5.1 5.9 Change +0.1 +0.1 +0.1 +0.2 +0.2
Automobile manufacturers would experience a small 0.1 increase in overall riskiness, due to sensitivity risk stemming
fossil fuel as an energy source for machinery and as an input. Higher energy prices would reduce the efficiency of chemical manufacturers by limiting their machinery use. Additionally, higher input costs would squeeze profitability. Nevertheless, on average, higher energy prices would have only moderate effects on individual automobile and chemical manufacturers because the recovering domestic economy and export markets would be strong enough to support industry growth under this scenario. However, although the absolute increases in risk were
small, higher energy costs can increase risk levels across entire supply chains. In particular, higher energy costs for chemical manufacturers will result in higher chemical prices, which translate to greater costs for paper manufacturers, pharma- ceutical manufacturers, cleaning supply manufacturers, metal product manufacturers and other industries that use chemical products. Higher operating costs, combined with an appreci- ating dollar as economic growth picks up, can erode the com- petitive advantages domestic manufacturers have gained over their international counterparts during the past five years. Exports and profitability will decrease, limiting the growth of US manufacturing.
The Bottom Line In the coming years, energy will play an even bigger role
in manufacturing. Manufacturers have already implemented automated production lines during the previous five years, and this trend will only continue through 2018. According to McKinsey Global Institute, the research arm of consul- tancy McKinsey & Co., labor costs will play an increasingly smaller role in overall manufacturing costs. Rising labor costs in China and other countries will reduce the effectiveness of labor-arbitrage, where manufacturers relocate to coun- tries with cheap labor. Instead, manufacturers must focus on transportation, technology, regulation, energy and other costs associated with the manufacturing process. Consequently, government energy and environmental policies will be es- pecially important for manufacturers. In particular, policies regarding the Keystone XL pipeline and hydraulic fracturing will have a major impact on energy prices and manufacturing costs in the US.
Energy Manufacturing 2013 15
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