a homecoming for u.s. manufacturing?...a homecoming for u.s. manufacturing? why a resurgence in us...

A Homecoming for U.S. Manufacturing? Why a resurgence in US manufacturing may be the next big bet CSCMP Chicago 30th Annual Spring Seminar March 14, 2013

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PwC

Global mega-trends are significantly shaping the demand for affordable energy and feedstocks

Rise and interconnectivity of the emerging markets (SAAAME)

Technological change

Demographic change

War for natural resources/Energy Security

Capital market changes

Social and behavioural change

Global instability

Regulatory environment Fiscal pressures Political and social unrest AD

AP

T

PL

AN

• Economic strength • Trade • FDI

• Infrastructure investments • Supply Chain risk • Intellectual Property

• Population growth discrepancies

• Ageing populations

• Healthcare for wealthy • Global middle class

• Urbanization • Global affluence

• Consumption patterns • War for Talent

• Disruptive technologies • Digital and mobile • IT driven productivity

• Technological and scientific R&D and innovation

• Oil, gas and fossil fuels • Biofuels • Food and water

• Key commodities • Climate change and

sustainability

• Capital flow • Credit access

• Debt management • Cost of capital

Industry changes

• Continuous consolidation • New mega players in Asia • Specialty is becoming

commodity

• Shale advantage to US • Overcoming the cycle • Influence of

SOEs/SWFs/PE

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The global middle class is forecast to grow by 180% between 2010 and 2040

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Global recoverable natural gas estimates

• Worldwide estimates indicate there is approximately 16,200 Trillion cubic feet of natural gas

• This equates to about 150 times annual global consumption rates

• Unconventional gas reserves (shale gas) are about 650 Trillion cubic feet, primarily in the U.S. and Canada

• The U.S has emerged as the fastest growing shale gas region

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North America shale gas plays

• Due to horizontal technology advances North American shale basins are viable sources of natural gas

• U.S. geological surveys estimate 650 Trillion cubic feet of unconventional gas

• Numerous shale basins contain natural gas liquids (ethane, butane, pentane, heptane)

• Natural gas liquids (NGL) are valuable feedstocks and energy sources for the petrochemical industry

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Natural gas use by U.S. manufacturing industry sector

• U.S. manufacturing consumes approximately 7.4 Tcf

• This represents about 32% of total U.S. natural gas consumption

• Manufacturing companies consumer about 85% of industrial gas sector

• Approximately 64% of natural gas in manufacturing is used in process heating and conventional boiler heating

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U.S. natural gas pipeline infrastructure, “the secret sauce”

Source: ICF International

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Drivers reshaping U.S. manufacturing

• Higher labor costs in emerging markets have been overemphasized as a potential driver of re-shoring to the U.S.

• Factors such as currency, supply chain risk, and transportation/energy cost are more important potential drivers.

• Of these three factors, transportation/energy cost should have the biggest impact due to advancements in the shale gas industry.

• The U.S. has been transformed into a low cost producer due to the technology advances in horizontal deep drilling and fracturing.

• Demand, talent, and availability of capital are other factors which make the U.S. relatively attractive for new investment; while the tax and regulatory environment make the U.S. relatively unattractive.

• Weighing all factors, the prospects for re-shoring are most significant in the chemicals and metals industries.

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Recent manufacturing announcements in U.S.

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Highlighted in the report by David Muir, the Made in America piece focused on NEUTEX’s opening of their 40,000 square foot Houston, Texas based Corporate Headquarters and Manufacturing facility and their continued and successful efforts to transfer the majority of their manufacturing processes from China to the Untied States…… “Neutex Press Release”

In the August 21st edition of the Austin American-Statesman, Samsung confirmed plans to spend 3 to 4 billion dollars converting half of its Austin chip manufacturing plant to a more profitable chip. The conversion should start in early 2013 with production on line by the end of 2013…… “Austin American-Statesman”

Otis Elevator Co.'s shift of some production to South Carolina from Mexico is expected to create about 360 jobs. Similar moves by Caterpillar Inc., General Electric Co. and Ford Motor Co. have created a few thousand more positions…… “Wall Street Journal”

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Manufacturers disclosing impact from shale gas

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Number of chemical, metal, and industrial manufacturers disclosing shale gas impacts

Avg. wellhead price =

$3.98/mil Btu


$4.57/mil Btu


$6.54/mil Btu


$5.34/mil Btu


$7.23/mil Btu

Source: Company Filings, Note: 2012YTD comprises data from 1/1/12 through 7/31/12 and has not been annualized

1 1 5

15 11

2

10

26

22

0

5

10

15

20

25

30

35

40

45

2008 2009 2010 2011 2012YTD

Source of downstream demand

Feedstock/energy cost-benefit

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U.S.-China labor cost comparison

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U.S. and China hourly manufacturing labor costs, US dollars


$3.98/mil Btu


$4.57/mil Btu


$6.54/mil Btu


$5.34/mil Btu


$7.23/mil Btu

Source: Economist Intelligence Unit, PwC Analysis

$0.66 $1.36 $2.49

$4.42

$28.66

$31.42

$33.70

$35.61

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

2004 2008 2012e 2016e

U.S. wage premium to China

China

US total: $29.32 $32.78 $36.19 $40.03

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Natural gas/U.S. manufacturing cost sensitivity analysis

23.53

27.01

31.56

38.66

42.74

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

2010 2025 2035

$ b

illi

on

s

High recovery/low price Low recovery/high price

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Total U.S. manufacturers estimated annual natural gas expenses under high and low shale gas recovery/price scenarios


$3.98/mil Btu


$4.57/mil Btu


$6.54/mil Btu


$5.34/mil Btu


$7.23/mil Btu

Source: EIA, PwC Analysis

$11.6 bil. est. annual savings

$11.2 bil. est. annual savings

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Natural gas/ U.S. manufacturing employment sensitivity analysis

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Estimated change in U.S. manufacturing employment under high and low shale recovery/price scenarios


$3.98/mil Btu


$4.57/mil Btu


$6.54/mil Btu


$5.34/mil Btu


$7.23/mil Btu

Source: BLS, EIA, PwC Analysis

2010 2025 2035

High recovery/low price Low recovery/high price

1.13 mil est. benefit to employment

1.08 mil est. benefit to employment


$3.98/mil Btu


$4.57/mil Btu


$6.54/mil Btu


$5.34/mil Btu


$7.23/mil Btu

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1.8

0.0 0.0

0.8

3.7

0.4 0.0 0.2 0.1

0.7

2.2

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

2001 ▪Sept. 11th

2002 ▪Port

Shutdown

2003 ▪CA Fires

2004 ▪H. Ivan

▪Asia Tsunami

2005 ▪H. Dennis ▪H. Katrina

▪H. Rita ▪H. Wilma

2006 2007 2008 ▪H. Ike

2009

2010 ▪GoM Oil

Spill ▪Chile Quake ▪Haiti Quake

2011 ▪AR Flood

▪Japan Quake

▪S/MW US Tornados ▪Thailand

Flood

Manufacturing supply chain impacts

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Financial impact of supply-chain events by United States F1000 manufacturers, $ billions

Source: Company Reports, PwC Analysis

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U.S. re-shoring example: Steel products industry

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Net difference in labor, transportation and inventory cost for steel products manufactured in US vs. China (% of sales)


$3.98/mil Btu


$4.57/mil Btu


$6.54/mil Btu


$5.34/mil Btu


$7.23/mil Btu

Source: Census Bureau, EIU, PwC Analysis

3.57%

0.34%

1.72%

1.01%

2.06%

2006 2007 2008 2009 2010

United States net cost advantage

China net cost advantage

-0.07%

0.10% 0.06% 0.24% 0.17%

3.18%

6.57% 7.37% 8.21% 8.11%

-6.68% -6.33%

-5.71%

-7.44% -6.22%

2006 2007 2008 2009 2010

Additional labor cost to manufacture in China and sell in U.S. (% of sales)

Additional transportation cost to manufacture in China and sell in U.S. (% of sales)

Additional inventory cost to manufacture in China and sell in U.S. (% of sales)

Breakdown of difference in labor, transportation and inventory cost for steel products manufactured in US vs. China

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Shale Gas - polyethylene (the number one plastic)

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Shale Gas - ethylene glycol (example of downstream product)

Ethylene Glycol is used as a coolant in industrial applications, antifreeze for vehicles, and precursor to polyester fibers and resins (such as those used in soda bottles)

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Shale gas presents significant benefits for domestic manufacturing

Na

tura

l S

ha

le G

as

Ethane

Methane

Propane

Butane

Ammonia

Methanol

Ethylene

Propylene

N-Butylene

Isobutylene

Manufacturing Sectors

Apparel and Accessories

Beverages and Tobacco Products

Chemicals

Computer and Electronics

Fabricated Metal Products

Food and Kindred Products

Leather and Allied Products

Machinery, Except Electrical

Nonmetalic Mineral Products

Paper

Petroleum and Coal Products

Pharmaceuticals

Plastics and Rubber Products

Primary Metal Manufacturing

Printed Matter and Related Products

Textile and Fabrics

Textile Mill Products

Transportation Equipment

Wood Products

Product Categories

Fertilizers

Adhesives

Alkyd Resins

Solvents

Corrosion Inhibitors

Textiles

Inks, Adhesives

Shampoos, Detergents, Soaps

Paints

Coatings

Pipes, Hoses, Wire Coating

Coolant, Antifreeze

Films, Packaging, Bottles

Paint Remover

Plastics

Tires and Rubber

Lubricant Additives

Solvent, Industrial Cleaners

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Resurgence prospects by subsector

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Prospects for selected subsectors


$3.98/mil Btu


$4.57/mil Btu


$6.54/mil Btu

Source: Census Bureau, BTS, BEA, PwC Analysis

Chemicals

Primary metals

Electrical equipment

Fabricated metal products

Machinery

Paper

Transportation equipment

Wood products

T

M

L

Materials

Transportation

Labor

T M L

T M L

T M L

T M L

T M L

T M L

T M L

T M L

Factor(s) tending to discourage re- shoring, compared to all US subsectors

Factor(s) tending to encourage re- shoring, compared to all US subsectors

Cost benefits and trade balances likely to favor US re-shoring

Cost benefits and trade balances that may favor US re-shoring

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U.S. manufacturing resurgence • The U.S. is experiencing a cyclical

rebound in manufacturing

• Resurgence is largely being driven by :

• Demand

• Rising labor costs in China

• Lower U.S. transportation, energy and material costs

• Currency

• Access to talent & IP

• R&D capabilities

• Proximity to customers

• Access to working capital

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A U.S. manufacturing resurgence?

• Currency, supply chain risks, and transportation/energy costs are the factors which augur most positively for the U.S. manufacturing sector.

• Likelihood of significant re-shoring activity varies significantly by manufacturing subsector.

• In particular, shale gas development in North America has the potential to be game changing over the next few years

• Cost savings in excess of $11b by 2025

• Creation of 1 million jobs

• Shale opportunity is both as a chemical feedstock as well as demand relating to other, non-chemical, manufacturing sectors.

• Considering all factors, we see chemicals and metals companies as likely to see the most re-shoring activity.

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Potential Limiting Factors

• One challenge is a need to build out infrastructure

• Distributions systems

• Refueling facilities

• Manufacturing investment

• Environmental impact of hydraulic fracturing

• Tax policy

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For additional information, please visit us at: www.PwC.com

• Drivers of re-shoring:

• Currency

• Supply chain risk

• Transportation/energy costs

• Benefits to the broader economy include:

• Energy affordability

• Demand growth

• Job creation

• Benefits to petrochemicals include:

• Energy affordability

• Feedstock

• Global competitiveness

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Speaker Biography

Garrett Gee – Director, Chemicals Advisory, PwC

Garrett advises global chemical industry executives in pragmatic and executable strategies to increase revenue and maximize profits. Garrett has over 25 years of chemical, oil, gas and utility industry experience working with companies in the United States, Europe, Middle East and Canada. This includes enterprise-wide and business unit strategy, operations management, supply chain management, business transformation, IT systems integration, innovation, shared services, commercial excellence and benchmarking. Garrett has deep domain knowledge in material technologies, polymer manufacturing, film processing, secondary operations, multi-layer extrusion, adhesives and coating technologies. He has extensive business process improvement experience in procurement to payment, order to cash, vendor managed inventory, logistics, forecasting, planning and scheduling. Garrett is an accomplished speaker and author in the chemical industry through such studies as “Shale Gas: reshaping the US chemicals Industry, 2012”, "High Performance Barrier Film Technology, 1998" and "High Temperature Polymers, 1997". His writings have been published in Plastics News, Paper and Pulp Magazine, Plastics Technology, and Chemical Marketing Reporter. Garrett holds a B.S. degree in chemistry from Morgan State University in Baltimore, MD. In his spare time he is involved with the National MS Society, Chemical Heritage Foundation, American Chemical Council, American Chemical Society, and enjoys playing golf and sailing. Garrett L. Gee Director, Chemical Advisory, PwC Email: [email protected] Mobile: 1.267.205.1258

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a homecoming for u.s. manufacturing?...a homecoming for u.s. manufacturing? why a resurgence in us...

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