Investors Counting on This One Commodity Could be in for a Rude Awakening
Back in 2005, everyone was worried about U.S. jobs moving overseas. When I spoke to groups, someone in the audience would inevitably stand up and ask if I thought this issue was a long-term problem for us. I always answered “no.” But not for the reasons they might have thought…
I would go on to explain that the U.S. was facing an ugly downturn in 2008 to 2010… one that would put almost all economic opportunities on ice. This would slow the move of jobs from here to anywhere.
Usually my audience met this answer with skepticism. That was okay. I was used to it. Still am.
But I was wrong… at least, in part.
The economic downturn arrived on schedule, and jobs stopped drifting overseas. In fact, for a couple of years jobs simply stopped. The problem of long-term unemployment reared its ugly head and has been with us now for five years.
But along the way, something else happened. Unexpectedly, electricity got cheap thanks to fracking and the low cost of natural gas.
Now we face a situation where wages have fallen for half a decade and energy costs are low. This combination is driving a trend of job reshoring, where jobs previously sent overseas are being brought back home.
For example, Whirlpool is adding about 100 jobs to its plant in Clyde, Ohio, where it makes washing machines. This move is expansionary. The company is not cutting production at its facility in Monterrey, Mexico, to increase production somewhere else. It’s simply growing its Clyde facility. And it’s a move that’s indicative of how companies are viewing the competitive position of the U.S.
When it comes to heavy or breakable items, manufacturers place a lot of emphasis on the distance from the point of production to the end retailer.
As costs in the U.S. spiraled higher during the 1990s and 2000s, the savings that producers could achieve by building in foreign locations trumped that problem of distance.
The current trend of more competitive U.S. wages and dramatic savings in energy are reversing this equation. For many items, manufacturers are finding it cheaper to produce here than to produce overseas.
This is good for our economy, but it comes with caveats.
Today, U.S. auto manufacturers plunk out millions of more units than they did in the 1970s, yet they employ tens of thousands fewer people. The reason is automation.
Even though the cost of employing people here has fallen, there’s no question that labor is still expensive. But the cost of automation keeps falling. So manufacturers are constantly on the lookout for new techniques and processes, for automating tasks that speed up production, lower error rates and reduce the cost of labor.
While jobs are coming back to the U.S., I wouldn’t say we’re seeing a manufacturing renaissance that will suddenly bring millions of jobs back home.
Compounding the automation issue is the low cost of electricity. Those robots need juice. While natural-gas prices are quite low today, at about $4.40 per mBTU, we don’t expect them to remain there.
The U.S. recovers abundant amounts of natural gas through fracking, but as of yet, it doesn’t export the fuel beyond Mexico. To get the gas farther from our shores we must liquefy it. Three plants have been approved for this process, but none are on line yet. The first is expected to open in 2015.
As the U.S. gears up to sell natural gas in the international markets — where prices are as high as $19 per mBTU in Asia — it’s only logical that our prices at home will increase, and could potentially double.
Then what happens to the math that made production at home more attractive? It’s entirely possible that the equation gets turned upside down once again.
Any investor — from the kinds who play with equities to those who manufacture stuff or hope to find work in the industrial space — who is counting on cheap energy for the next decade, particularly from the likes of natural gas, could be in for a rude awakening.
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