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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
www.pwc.com
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
2
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PwC
The global middle class is forecast to grow by 180% between 2010 and 2040
4
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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
5
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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
6
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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
7
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U.S. natural gas pipeline infrastructure, “the secret sauce”
Source: ICF International
8
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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.
9
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Recent manufacturing announcements in U.S.
10
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”
PwC
Manufacturers disclosing impact from shale gas
11
Number of chemical, metal, and industrial manufacturers disclosing shale gas impacts
Avg. wellhead price =
$3.98/mil Btu
Avg. wellhead price =
$4.57/mil Btu
Avg. wellhead price =
$6.54/mil Btu
Avg. wellhead price =
$5.34/mil Btu
Avg. wellhead price =
$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
PwC
U.S.-China labor cost comparison
12
U.S. and China hourly manufacturing labor costs, US dollars
Avg. wellhead price =
$3.98/mil Btu
Avg. wellhead price =
$4.57/mil Btu
Avg. wellhead price =
$6.54/mil Btu
Avg. wellhead price =
$5.34/mil Btu
Avg. wellhead price =
$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
PwC
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
13
Total U.S. manufacturers estimated annual natural gas expenses under high and low shale gas recovery/price scenarios
Avg. wellhead price =
$3.98/mil Btu
Avg. wellhead price =
$4.57/mil Btu
Avg. wellhead price =
$6.54/mil Btu
Avg. wellhead price =
$5.34/mil Btu
Avg. wellhead price =
$7.23/mil Btu
Source: EIA, PwC Analysis
$11.6 bil. est. annual savings
$11.2 bil. est. annual savings
PwC
Natural gas/ U.S. manufacturing employment sensitivity analysis
14
Estimated change in U.S. manufacturing employment under high and low shale recovery/price scenarios
Avg. wellhead price =
$3.98/mil Btu
Avg. wellhead price =
$4.57/mil Btu
Avg. wellhead price =
$6.54/mil Btu
Avg. wellhead price =
$5.34/mil Btu
Avg. wellhead price =
$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
Avg. wellhead price =
$3.98/mil Btu
Avg. wellhead price =
$4.57/mil Btu
Avg. wellhead price =
$6.54/mil Btu
Avg. wellhead price =
$5.34/mil Btu
Avg. wellhead price =
$7.23/mil Btu
PwC
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
15
Financial impact of supply-chain events by United States F1000 manufacturers, $ billions
Source: Company Reports, PwC Analysis
PwC
U.S. re-shoring example: Steel products industry
16
Net difference in labor, transportation and inventory cost for steel products manufactured in US vs. China (% of sales)
Avg. wellhead price =
$3.98/mil Btu
Avg. wellhead price =
$4.57/mil Btu
Avg. wellhead price =
$6.54/mil Btu
Avg. wellhead price =
$5.34/mil Btu
Avg. wellhead price =
$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
PwC
Shale Gas - polyethylene (the number one plastic)
17
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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)
18
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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
19
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Resurgence prospects by subsector
20
Prospects for selected subsectors
Avg. wellhead price =
$3.98/mil Btu
Avg. wellhead price =
$4.57/mil Btu
Avg. wellhead price =
$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
PwC
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.
22
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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
23
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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
25
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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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