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Global Manufacturers Are Moving Production to the United States

May 7, 2013
According to forecasting firm IHS Global Insight, companies in the chemical-manufacturing sector alone are building U.S. plants worth an estimated $95 billion.

Historically low energy prices in the United States -- particularly natural gas prices -- have provided incentives to European and other global manufacturers to expand their operations in the United States. Industry analysts attribute the price levels primarily to innovations in accessing previously uneconomical shale gas deposits through hydraulic fracturing ("fracking").

The International Energy Agency forecasts that the United States will overtake Russia as the world's largest natural gas producer by 2015. U.S. natural gas prices dropped to as low as a quarter of European prices during 2012. Natural gas prices in Asia are generally even higher than those in Europe. Access to lower-priced natural gas is especially appealing for manufacturers in energy-intensive industries such as steel and chemicals, because these manufacturers can use natural gas as both a raw material and a power source. According to forecasting firm IHS Global Insight, companies in the chemical-manufacturing sector alone are building U.S. plants worth an estimated $95 billion.

As a result of the substantial current disparity in natural gas prices, more jobs for such manufacturers are being created in the United States, while there is reduction in jobs in Europe. Top officials from German chemical giant BASF (IW 1000/33), which has invested heavily in the United States over the last several years, have stated that such jobs will continue to leave Europe for the United States unless Europe changes its current policies to allow more energy production, particularly through fracking.

European and other global manufacturers' investments in the U.S. appear to indicate optimism that the U.S. price advantage will remain for a substantial period of time. In addition to the BASF investments mentioned above, Austrian steelmaker Voestalpine (IW 1000/313) recently announced that it will build a processing plant in Texas that is expected to cost $715 million and create 150 jobs. Meanwhile Voestalpine has reportedly abandoned most plans for major new investments in Europe.

Similarly, Royal Dutch Shell (IW 1000/1) recently announced plans to build a multibillion-dollar petrochemical plant in Pennsylvania that will employ several hundred full-time workers. South African energy and chemical company Sasol (IW 1000/252) announced plans late last year to spend $11 billion to $14 billion constructing a plant in Louisiana to convert natural gas to liquid fuels, creating an estimated 1,200 permanent jobs at the facility.

Lower gas prices have contributed to a 5% annualized U.S. industrial production growth rate since the Great Recession technically ended in 2009, more than twice the growth rate of the economy as a whole. Some economists, however, point to other factors, including pent-up demand and the weaker dollar as possible explanations of industrial production growth in addition to the benefit of low gas prices. The U.S. natural gas price advantage may decrease over time due to factors including possible increased U.S. demand, decreased U.S. production, and increased U.S. exports. For now, though, business leaders and economists generally agree that lower energy prices due to fracking improve the outlook for U.S. manufacturing.

Jeffrey Telep is a partner and Joshua Snead is an associate with the International Trade Group at King & Spalding’s Washington, D.C., office. This article first appeared in King & Spalding’s Trade & Manufacturing Alert.

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