By Peter Sainsbury, Materials Risk
According to Jeremy Grantham at asset management firm GMO US natural gas prices are likely to triple within five years (from around $4/mmbtu currently) as a short term surplus turns into a long term deficit. In comparison, the latest forecast from the EIA is for gas prices at end 2014 at $3.97/mmbtu while forward prices are only a little higher at $4.44/mmbtu. Grantham believes that with prices at less than half the price of other major economies there will be a huge increase in demand from plastics manufacturers, petrochemical companies, fertiliser producers and others (see figure 1).
However, as Goldman Sachs recently reported “The US Manufacturing Renaissance: Fact or Fiction?” points out despite the supposed competitive advantage that US manufacturers have:
“we have not yet seen a material pickup in output in the parts of the manufacturing sector that should benefit most from low natural gas prices, such as aluminum, steel, plastics, basic chemicals, and fertilizer and other agricultural product.” (see figure 2)
As the Economist reports, it may be too soon to count out energy intensive users taking advantage of cheap energy…
“On the Gulf coast (another gas hub), Chevron Phillips, Dow Chemical, Formosa Plastics, Occidental Petroleum and Williams are all expanding existing chemical plants or building new ones. A chemical firm called Methanex is dismantling one of its factories in Chile and shipping it to Louisiana to take advantage of low gas prices. CF Industries is expanding its local fertiliser production. Nucor, a steel firm, is building a new mill. Sasol of South Africa hopes to build a refinery in Louisiana to turn gas into petrol…Orascom, an Egyptian conglomerate, plans to build a $1.4 billion fertiliser factory in Iowa. Bridgestone, Continental and Michelin are all planning to make more tyres in South Carolina, reversing a long decline.”
Nevertheless, PwC point out cheap energy isn’t the only factor behind “A Homecoming for US Manufacturing”. While energy costs are part of the story the report finds that relative labour costs, the dollar, US demand, US talent, availability of capital and the tax and regulatory environment are all factors in determining re-shoring decisions.
However, even accounting for all the other factors, given current price differentials, a tripling in US natural gas prices would still mean cheaper energy costs than either Europe or Asia. Perhaps the coming US manufacturing renaissance and rise in US natural gas prices will come quicker than we think.