Chemical cost/supply pressures are weakening U.S. manufacturing

Source: Manufacturing Digital

Date :6/8/2007 10:56:18 AM

Underlying energy challenges could lead to shifting production offshore.

U.S. manufacturing is threatened by the rising cost and shrinking supply of chemicals that are necessary to make things, according to a new report by AMR Research and The Manufacturing Institute, the research and education arm of the National Association of Manufacturers (NAM). One in four manufacturing companies say they will move some production offshore if chemical cost and supply pressures persist.

The report, based on findings from a survey of 165 U.S. manufacturing companies ranging in size from less than 100 employees to more than 50,000 employees, found that:

• 55% of companies overall have significant, direct dependence on chemicals for their production

• 73% of food, medicine and other process manufacturing operations depend directly on chemicals

• Two-thirds overall depend, either directly or indirectly via their suppliers, on chemicals as a major raw material

• 50% of companies say they cannot replace these materials with any substitutes;

• 40% say it is possible, but expensive to find replacements

• 90% of companies overall see chemical costs rising, with 62% calling the increase “substantial”

• 43% see domestic chemical capacity decreasing

• 25% of companies say they will move, on average, about one third of production offshore if trends do not change

“Chemicals are a critical link in the supply chain for two-thirds of U.S. manufacturers, but America’s chemical industry is threatened by rising domestic natural gas costs. At stake is not only the future health of chemical manufacturing firms, but also the thousands of companies that use their chemicals to make everything from crayons to computers. America needs a robust energy strategy to ensure affordable supplies, future development and greater efficiency,” says NAM President and CEO John Engler.

“Domestic chemical supplies are a vital raw material to most manufacturers in America, but rising natural gas prices are forcing U.S. chemical manufacturers to consider moving offshore,” says Kevin O’Marah, senior vice president, AMR Research. “Many of the large manufacturers that source those chemicals say they will follow them in order to remain competitive. Smaller manufacturers will be affected, as they are less able to relocate production offshore and likely to see reduced demand for their products if their big-company customers close domestic plants.”

The report, “The Hidden Backbone of U.S. Manufacturing: Weakening Under Chemical Cost and Supply Pressures,” describes how everything from food packaging to metals processing depends on bulk chemical inputs, ranging from polymers that appear as plastics to adhesives and coatings on automobiles and household goods.

“The report takes a new look at chemicals as a critical raw material for most U.S. manufacturers. This manufacturing supply chain is not evident to many Americans, yet it plays a central role in our high standard of living, and its health will determine how many high-paying manufacturing jobs stay in this country,” comments Bill Canis, acting president of The Manufacturing Institute, the research and education arm of the NAM.

The study points out that domestic energy costs in the United States – especially natural gas -- have risen dramatically compared to other major industrial economies, noting this may be why of the more than 80 new, large scale chemical plants on the drawing boards now around the world – each an investment of $1 billion or more with thousands of high-paying jobs – none is planned for the United States.

“Energy policy drives the competitiveness of domestic chemical production, which is the most critical link of the manufacturing supply chain for chemical-using manufacturers. More needs to be done to ensure America’s energy security and competitiveness,” Engler concludes.

For a copy of the new report, click on www.nam.org/chemicalcoststudy