June 2007
By William Canis, acting president, The Manufacturing Institute, National Institute of Manufacturers
The health of the manufacturing economy, including the paper and pulp industry, is critical to the health of the US economy. Fourteen million men and women work in the US manufacturing sector, which accounts for 12% of the nation's GDP. That's about $1.5 trillion of wealth created in 2006, the most productive year for manufacturing in the history of this country. Yet America's continued leadership in manufacturing is not a given, especially in a time of unprecedented global competition.
Our new report with AMR Research, "The Hidden Backbone of U.S. Manufacturing: Weakening Under Chemical Cost and Supply Pressures," found that US manufacturing is threatened by the rising cost and shrinking supply of the chemicals used as a vital raw material by the paper and pulp industry and other manufacturers.
This research, based on a survey of 165 manufacturing companies ranging in size from less than 100 employees to more than 50,000 employees, found that chemicals are a critical link in the supply chain for two-thirds of US manufacturers, but America's chemical industry is threatened by 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.
Offshoring of production may result
Survey results showed the dependence of most manufacturers on chemicals:
- Domestic chemical supplies are a vital raw material to most manufacturers in the US. Overall, 55% have significant, direct dependence on chemicals for their production.
- 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
- 90% of companies see chemical costs as rising, with 62% calling the increase "substantial"
- 43% see domestic chemical capacity decreasing.
Most alarming, one in four manufacturing companies say they will shift some production offshore if chemical cost and supply pressures persist. This could cause a ripple effect from large companies down to small companies, as plants close or are downsized.
The implications of these possible production shifts should be of concern to anyone interested in the future of our industry in America. The capability of the US to manufacture essential goods domestically depends on a clustered economic and industrial infrastructure. These clusters are important to competitiveness. As Harvard Business School professor Michael Porter has said, "Nations succeed not in isolated industries but in clusters of industries connected through vertical and horizontal relationships." A core component of this necessary infrastructure is the availability of supply from the chemical industry to downstream users.
Energy policy drives competitiveness
The main factor affecting the decision among chemical suppliers to stay in the US is the price and availability of natural gas as compared to other parts of the world. The question this survey raises is whether US policymakers are aware of how the mechanics of our 21st-century supply chain have raised the stakes for natural gas and energy policy as it impacts the chemical industry and, as a result, downstream manufacturers' business decisions.
The study points out that domestic energy costs in the US, 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 -- none is planned for the US.
Simply put, energy policy drives the competitiveness of domestic chemical production, which is the most critical link of the manufacturing supply chain for chemical-using manufacturers such as the paper and pulp industry. Congress needs to do much more to ensure that America has affordable, internationally competitive energy supplies. We have vast reserves that Congress has put off-limits, and policymakers should develop a plan to utilize more of them.
Policies impacting the vital chemical industry affect almost all of the manufacturing economy. This manufacturing supply chain is not evident to many Americans, yet its health will determine how many high-paying manufacturing jobs stay in this country.
For a copy of the new report, visit www.nam.org/chemicalcoststudy.
Pulp & Paper magazine is FREE to qualified subscribers. Click here to find out more.
