How You Could Profit Profit From Cheap Natural Gas Prices.
The future of manufacturing is in America, not China,’ declared Vivek Wadhwa in Foreign Policy magazine.
Wadhwa argues that technology is going to save the US. In fact, ‘technical advances will soon lead to the same hollowing out of China’s manufacturing industry that they have to US industry over the past two decades.’
Robotics is the first saviour. It’ll soon be cheaper to build and install robots than to use human labour. As Wadhwa notes, Taiwan-based Foxcomm plans to install one million robots in the next three years. ‘It has found even low-cost Chinese labour to be too expensive and demanding.’
Meanwhile, advances in artificial intelligence, and 3D printing, will enable non-experts to design and personalise products, then “print” them off at home or at local manufacturing hubs.
Combine all this with the magic of ‘America’s ability to innovate’, and the US will be a world leader in manufacturing within the next decade.
It’s all very exciting stuff. But there’s another big trend with the potential to drive all this that Wadhwa doesn’t address. And it’s one you can profit from right now…
However, while the idea of localised factories driving a creative manufacturing renaissance in the States is attractive, we think there’s a far more down-to-earth reason for companies to do more business in the US.
It all boils down to the shale gas revolution.
In short, at the start of this century, the US was looking at becoming a natural gas importer. Now, thanks to the opening up of shale gas fields, some believe the country has nearly a century’s worth of gas supplies. It’s now looking at exporting the surplus, rather than being forced to import new supplies.
As a result, natural gas prices have plunged. That’s meant big shifts in the US energy mix. Gas now provides nearly a quarter of America’s electricity, up from a fifth in 2006.
Meanwhile, use of coal has dropped. Indeed, as The Economist points out, America’s greenhouse gas emissions have fallen by 450 million tonnes over the past five years, ‘the biggest anywhere in the world.’
Last year, accountancy group PricewaterhouseCoopers argued that by 2025, ‘the manufacturing sector could save $11.5bn in energy costs.’ The group suggested that as many as a million new US manufacturingjobs could result from cheap gas.
Among the biggest beneficiaries are chemicals companies. Why? Because, as The Economist notes, they use gas ‘to make chemicals such as methanol and ammonia, a vital ingredient of fertiliser.’
As a result, petrochemicals have remained cheap, ‘even as oil prices have peaked’. In turn, cheap petrochemicals mean lower costs for all the other businesses who use them, from car manufacturers to agriculture companies.
So you can see that there’s a virtuous circle going on here. The cheap natural gas gives rise to both cheaper energy and cheaper raw materials. As PwC point out, you also have added demand for manufacturers to build products for the gas extraction industries.
Indeed, the number of rigs drilling for natural gas is near a 13-year low, according to oil services firm Baker Hughes. So far this has had little impact on prices, as it will take a while for gas output to be affected, mainly because natural gas is still being produced as a by-product of oil wells.
But in the longer run, if prices don’t support production at economic levels, then production will simply have to fall until prices pick up. This suggests that the natural producers who can survive the hard times might be in the best position to profit when natural gas prices recover.
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in MoneyWeek (UK).
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