New BCG Study: Shale “Accelerating an American Manufacturing Renaissance”

Thanks to the safe development of clean-burning natural gas, manufacturing is coming roaring back in America. As President Obama has said, “We produce more natural gas than any country on Earth. … We’ve got to tap into this natural gas revolution that’s bringing energy costs down in this country, which means manufacturers now want to locate here because they’re thinking that we’ve got durable, reliable supplies of energy.”

The President is absolutely right — and experts from across the spectrum agree.

  • Charles Ebinger, a Brookings Institution senior fellow, writes this week that “The United States is in the midst of an energy transformation in which our vast abundance of cheap natural gas and rising production of crude oil pose the opportunity for a manufacturing renaissance and a revitalization of the North American industrial base.”
  • Time Magazine reports this: “While natural gas prices in the U.S. are hovering at historic lows—keeping energy prices down and boosting to the American manufacturing sector—prices in Europe are three times higher and consumers in Asia pay even more.”
  • Mark Haefele, Global Head of Investment at UBS, writes this today on “New shale extraction technology is ushering in an era of lower energy costs in the US that will have an impact around the world. Lower energy costs mean downward pressure on inflation and manufacturing costs. … Lower energy costs mean US manufacturing becomes cheaper and the US becomes more attractive as an investment destination. … The combination of rapid manufacturing innovation and low energy costs were key factors in America’s industrial revolution during the 19th century and could hold similar promise in the 21st.”
  • And The Economist writes this under the headline “The energy boom is good for America and the world”: “RISE early, work hard, strike oil.” The late oil baron J. Paul Getty’s formula for success is working rather well for America, which may already have surpassed Russia as the world’s largest producer of oil and gas. By 2020 it should have overtaken Saudi Arabia as the largest pumper of oil, the more valuable fuel. By then the “fracking” revolution—a clever way of extracting oil and gas from shale deposits—should have added 2-4% to American GDP and created twice as many jobs than carmaking provides today. All this is a credit to American ingenuity.”

And this week, a new analysis from The Boston Consulting Group (BCG) – one of the world’s top business and management consulting firms – determines how far-reaching shale-related benefits are for America’s manufacturing sector, underscoring the fact that “virtually every manufacturer in the U.S. is poised to benefit.”

Fox Business reports this about BCG’s study:

Inexpensive natural gas may be giving the U.S. a powerful and unique cost advantage that is incentivizing hundreds of companies to manufacture in the United States. According to research conducted by Boston Consulting Group that was released Thursday, cheap natural gas will have a critical impact on U.S. manufacturing over the next several years that will benefit a wide variety of industries, from feedstock to finished goods.

Here are key excerpts from BCG’s research:

  • While other studies have assessed the positive economic impact of rising U.S. production of natural gas on the domestic energy sector and on industries such as petrochemicals that use natural gas as a raw material, the new BCG analysis finds that virtually every manufacturer in the U.S. is poised to benefit—directly or indirectly.
  • Low U.S. electricity prices in natural-gas-fired plants, for example, are already encouraging investment in energy-intensive industries such as steel and glass. Not yet visible are the advantages that makers of intermediate products, such as plastic-resin pellets, and makers of finished goods, such as plastic toys and plastic auto parts, will reap from cheaper inputs. Even in less energy-intensive industries, cheap natural gas will shave 1 to 2 percent off of U.S. manufacturing costs as the benefits eventually flow downstream through the value chain.
  • “Several major forces are aligning right now that are dramatically reversing the fortunes of a U.S. manufacturing sector that many gave up for dead just a few years ago,” said Harold L. Sirkin, a BCG senior partner and a coauthor of the study. “The energy advantage and improved competitiveness are unique to the U.S. and are accelerating an American manufacturing renaissance.”
  • Multiple, Sustainable Advantages for U.S. Manufacturing. Wholesale prices for natural gas have fallen by around 50 percent since 2005, when large-scale recovery from underground shale deposits through hydraulic fracturing began in earnest. Natural gas currently costs more than three times as much in China, France, and Germany than in the U.S. and nearly four times as much in Japan.
  • By 2015, natural gas will account for only 2 percent of average U.S. manufacturing costs and electricity will account for just 1 percent, according to BCG estimates. By contrast, natural gas will account for between 5 and 8 percent of manufacturing costs in Japan and in Europe’s major exporting economies, where it is more expensive, while electricity will account for between 2 to 5 percent in Japan and Europe. Cheap energy will also help further narrow the cost gap between the U.S. and China, where natural gas and electricity combined will account for 6 percent of manufacturing costs.
  • Cheap natural gas is enhancing U.S. manufacturing competitiveness in several important ways. The most immediate beneficiaries are manufacturers of a wide range of petrochemicals, which enjoy a cost advantage of up to 50 percent over their counterparts in Europe and Asia. As a primary feedstock, these chemicals use ethane, which is also found in many natural-gas fields, as well as propane and butane, which are byproducts of natural-gas production. Much of those cost savings will pass to downstream manufacturers that use those petrochemicals to make everything from plastics to synthetic fabrics—and eventually to U.S. consumers.
  • Natural gas is used increasingly as a fuel in U.S. power plants. Therefore, it is likely to ensure that the price of industrial electricity will remain between one-quarter and two-thirds the cost of electricity in major exporting nations such as China, Japan, Germany, France, and Italy for a significantly long time. This will benefit all manufacturers to a varying degree, but in particular energy-intensive industries such as glass and steel. The BCG research estimates that low natural-gas prices help give U.S.-based glass makers a 40 percent cost advantage over South Korean producers, for example, and a 63 percent advantage over German producers. A new steel mill using direct-reduced iron (DRI) technology, which uses low-cost natural gas, produces iron (the key ingredient in steel) substantially more cheaply than mills using conventional blast furnaces.
  • A Boon for Domestic and Foreign Manufacturers in the U.S. “Companies from around the world are already taking notice and beginning to make long-term manufacturing investments in the U.S. to take advantage of low-cost natural gas,” said Michael Zinser, a BCG partner. “Already tens of billions of dollars in new investments have been announced, and we expect to see more such investment in the near future.” … “A number of industries are already nearing a tipping point where it will be more economical to make many goods in the U.S.,” said Justin Rose, a BCG partner and another coauthor. “The energy advantage helps them reach that tipping point faster.”