INSIGHT: US chemical prices erode manufacturing

10 May 2007 15:56  [Source: ICIS news]

By Joe Kamalick

 

WASHINGTON (ICIS news)--The rising cost of natural gas and its knock-on effect on chemicals pricing are undermining the broad American manufacturing sector, according to a new study that should be deeply disturbing to US policymakers.

 

In a survey of a wide variety of US manufacturing firms, AMR Research found that they anticipate moving 25% of their production capacity abroad, chiefly because chemicals essential to their products or manufacturing processes are becoming increasingly expensive with supplies sometimes uncertain.

 

At the request of the National Association of Manufacturers (NAM), AMR Research surveyed 165 manufacturing firms across the US, ranging in size from less than 100 employees to more than 50,000.  Among the survey’s major findings:

• Some 55% of manufacturers have significant, direct dependence on chemicals for production. That dependence increases to 73% for food, medicine and other process manufacturing operations. As much as 66% of manufacturers overall depend directly - or indirectly through suppliers - on chemicals as major raw materials. 
• Half of the surveyed firms said they cannot replace those chemical raw materials with alternative substances. An additional 40% of the survey respondents said it would be possible but expensive to find replacement materials.
• Almost all of the companies surveyed, 90%, said they see chemical costs rising, with 62% saying price increases are substantial.
• A substantial segment of manufacturers anticipate they will have trouble maintaining reliable supplies of needed chemical raw materials, with 43% saying the expect domestic US chemical capacity to decrease. Only 20% said they expect chemical productive capacity to expand.

AMR Research said it asked manufacturing industry leaders what lies behind the perceived increases in chemical costs and got an overwhelming response identifying the rising cost of energy, particularly for natural gas.

 

The US chemicals industry is almost wholly dependent on gas as a feedstock, and the sector is doubly vulnerable to gas price hikes because those increases invariably mean higher power costs for the industry’s high energy requirements.

 

Earlier this week, the US Department of Energy revised upward its forecast for US natural gas prices for this year to an average $7.84/m Btu, nearly a dollar higher than last year. 

 

The department said natgas prices, driven by a 3.4% increase in domestic demand amid a slim 1% boost in domestic production, will increase to an average of $8.16/m Btu next year. 

 

That compares with gas prices of $1 to $2/m Btu that prevailed for decades until 1999-2000 when increasing demand, including sharply higher use of gas to generate electricity, began to outstrip production from maturing North American fields.

 

AMR said the survey results show that “chemical supply represents a hidden backbone of US manufacturing since much of what is manufactured depends on upstream chemical content”.

 

“This report shows that this key infrastructure component has increasingly been hampered by growing upstream costs within the US,” AMR said.

 

The report cited as an example the energy cost increases faced by Dow Chemical.  The company’s energy spending accounted for 22% of its overall costs in 2002 but rose to 50% by 2005.

 

Dow Chemical spends $12bn (€8.9bn) a year in energy costs in the US, AMR said, but it would spend just over half that, $7bn/year, if it moved its US plants to Germany and as little as $1.5bn if it shifted all its US production to the Middle East. 

 

AMR noted that Dow has closed 20 US production facilities in recent years, in part because US restrictions on natural gas drilling and use are making it more difficult for the company to compete effectively.

 

About 85% of US offshore oil and gas reserves are closed to development under 25-year-old congressional moratoria that were imposed in the early 1980s, when gas was cheap and plentiful, for fear of beachfront contamination along recreational coastlines.

 

Some in Congress have recognised the threat posed to the US chemicals industry and the broader manufacturing sector by the high cost of natural gas, and Congress has made incremental progress in opening slim portions of the resource-rich US outer continental shelf to energy development. 

 

However, opposition to broad development of extensive US onshore and offshore energy reserves remains strong.  Key coastal state senators and members of the House have vowed to block any further offshore energy development.

 

In time, and as the US manufacturing sector continues to decline, those congressional sentiments likely will change. Change comes slowly in the august halls of Congress, and by the time legislators in their wisdom decide to open the energy gates, the US will have already lost a significant share of its manufacturing base - perhaps more than it can afford.

By: Joe Kamalick
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