Can The Big Shift In Energy Bring A Return Of Industrial Demand?

Outsourcing has become a dirty word in the 2012 election, in part, because over the last decade the US lost more than 5 million jobs to offshore emerging markets. While politicians are busy scoring points about which party or players are responsible for these job losses, they are losing sight of a reversal of fortunes now taking place that offers the potential of bringing many of these manufacturing jobs back to the US—if we get our policy and political act together.

Accenture just released a new research report entitled “North America Flexes its Industrial Muscle” assessing the reasons for this change in global competitiveness that is pulling the US back into the game from productivity improvements from automation, rising wages in China and India reducing the US gap, low natural gas prices and abundant supply from shale E&P improve US competitiveness as a source of feedstock for chemicals and other manufacturing. The US remains a large and attractive market and lower cost US production also benefits from lower transportation costs and a reduced carbon footprint.

The report says the US should not expect mass-produced commodities like electronics to be uprooted and rebuilt in North America. That infrastructure is sunk, demand is expected to grow fast in Asian markets and the purpose of the capital invested was to build an exports-driven industrial base to fuel domestic economic growth. There is even good news in this continued Asian export market growth for North America. The revival back here at home is taking place in high value-added final assembly such as automobiles and in feedstock driven industries in chemicals, pharma and their research units.

North American industrial manufacturing capacity is forecast to grow from 26 percent of the global total in 2012 to 28 percent in 2016. Not only is North America expected to see gains from manufacturing returning from Asia but it will also pick up market share from manufacturing declining in Europe according to Accenture. More than 61 percent of respondents in Accenture’s survey of nearly 290 manufacturing executives responded that they were considering moving their sources of supply closer to end markets.

The factors driving this rebirth of manufacturing the US include the slowing of the economies in China, India, Brazil and other emerging markets and the volatility and uncertainty it produces. The combined global effects of the euro crisis weakening demand for Asian market exports and rising complaints against China over trade practices that have resulted in anti-dumping duties and other trade tariffs in wind towers and photovoltaic panels.

As emerging markets feels these impacts they have become less attractive to foreign direct investment, and the US and Canada offer safety and security that comes as a price in emerging markets. The Accenture study reports investments in China were down by 40 percent from 2003 to 2011 while investment in the North America was up during the same period.

Domestic US Energy Production Growth Is Driving Industrial Revival
Domestic energy production especially natural gas has boosted supply and driven down net imports of natural gas into the United States by 25 percent in 2011. US EIA says a combination of export growth and lower imports produced the decline in net imports. Preliminary data for 2011 suggests that domestic dry natural gas production grew about 8 percent to 23,000 billion cubic feet (Bcf) in 2011 but total natural gas delivered to consumers was up by just 2 percent. This increase in domestic natural gas supply helped drive down prices in the United States. Lower domestic natural gas prices at Henry Hub compared to foreign market prices for liquefied natural gas (LNG) is encouraging export of excess natural gas.

Higher export prices are expected to create a higher price floor on domestic gas prices as markets look for equilibrium. US EIA says seven project sponsors filed export applications with the Department of Energy (DOE) for domestic LNG. As of June 30, 2012, Sabine Pass Liquefaction LLC is the only US DOE approved export terminal for LNG sales to both Free Trade Agreement and non-Free Trade Agreement countries.

Low domestic US natural gas prices combined with the manufacturers ability to avoid higher foreign LNG costs, avoid transportation costs of both feedstock and finished products imports to the US and the narrowing gap in wages and other costs compared to emerging markets is making "Made in America" a winning strategy once again.

While that is good news for an American economy desperate for growth, it will also add pressure on electricity reserve margins which are tightening in ERCOT and WECC (due to the outages of California nuclear plants) and in the Eastern interconnect due to coal plant retirements. Fuel demand for power generation has largely displaced industrial demand but if that industrial demand comes back more power generation will be required to serve it. But that will be a good problem to have.