Saturday, April 07, 2012

More on the Great American Manufacturing Renaissance: And It's Just Getting Started

Off a Cliff: Falling natural gas prices are making U.S. manufacturers more competitive.

From today's WSJ article "The Great Reversal: Playing the U.S. Manufacturing Boom":

"Investors who have favored emerging markets like China in recent years should pay attention to another growing manufacturing center. It boasts plenty of skilled workers; cheap and abundant energy; stable institutions; and a large middle class that likes to shop. It is the U.S., where a long industrial decline might be in reverse.

In March, manufacturing expanded for the 32nd straight month, and contributed 37,000 of the 120,000 U.S. jobs added, the government reported (see related CD post). That's partly because of the ongoing recovery from the Great Recession. But the economy is also changing.

Three trends suggest America's "manufacturing renaissance" is just getting started, says Neil Dutta, U.S. economist at Bank of America Merrill Lynch.

1. The cost advantages of outsourcing factory work are narrowing. Emerging market wages, while still much lower than U.S. wages, are rising, and high oil prices have made shipping more expensive. That is expanding the range of goods U.S. factories can produce at competitive prices (think sophisticated machines, not toys).

2. A weakening dollar makes U.S. goods more attractive to foreign buyers. The dollar has fallen by nearly one-third over the past decade against a basket of currencies including the euro, British pound and yen.

3. Energy production is booming in the U.S., and domestic natural-gas prices have recently plunged. That gives an edge to U.S. producers of fabricated steel, transportation equipment, machinery and chemicals, which use natural gas extensively, according to a recent report from Citigroup."

HT: Robert Kuehl

11 Comments:

At 4/07/2012 11:10 AM, Blogger FloridaSteve said...

While this is excellent news, you left out the effects of robotics in production and assembly. It's likely that this will not have the same effect on employment as in days gone by.

 
At 4/07/2012 1:25 PM, Blogger morganovich said...

mark-

i am wondering whether there might be another factor that is giving the manufacturing resurgence a tailwind: an increase in right to work states.

manufacturing under the thumb of big unions like the uaw has been a disaster for US industry. with more and more states going "right to work" i suspect that we are seeing manufacturers becoming able to be more flexible.

i think the other biggest shift has been infrastructure.

Chinese ports and rail are badly overstressed.

in the last 12-28 months, i have heard an absolute litany of stories about firms that ran into often very serious delays because they could not get goods from china on promised schedules. i am less convinced that we are seeing reshoring due to prices or wage convergence, but rather, because in an age of JIT manufacturing, china is no loner reliable enough on delivery times.

 
At 4/07/2012 1:42 PM, Blogger Benjamin said...

The Fed needs to keep the ball rolling. The dollar should be driven down from here to help US industries, tourism. It needs to be a long-term plan---regime certainty, so manufacturers are assured thy can set up plants here in a stable exchange rate environment, in which the dollar is export-freindly.

 
At 4/07/2012 1:55 PM, Blogger Mark J. Perry said...

Morgan:

I think you're exactly right:

1. Indiana just became the 23rd Right-to-work state, and Minnesota passed a right-to-work bill in the state Senate.

2. The degree of unionization in the private sector fell to 11.8% in 2011, the lowest in modern history. It was 30% 1970.

3. The two-tiered wages for the UAW are significant and historic. Ford, GM and Chrysler can now hire new workers for "half-price" ($14-16 per hour) compared to seasoned workers at $28-30 (and new workers up until several years ago). That is one reason that both Ford and GM are making major investments in the U.S. and why Ford plans to hire 6,000 more workers in the coming years. Ford is also moving production back to the U.S. from Mexico and Japan.

 
At 4/07/2012 5:38 PM, Blogger Benjamin said...

CRUDE OIL DERIVATIVES TRADERS CHARGED WITH MANIPULATION OF NYMEX CRUDE OIL FUTURES DURING EARLY 2008
by CHRISTOPHER J. GRAY on MAY 25, 2011
in UNCATEGORIZED
The Commodities Futures Trading Commission filed a case on May 24, 2011 alleging that certain commodities traders including Parnon Energy, Inc., Arcadia Petroleum Ltd. and Arcadia Energy (Suisse) SA ("Defendants") violated the Commodities Exchange Act. The complaint alleges that defendants caused the price of futures and options contracts on West Texas Intermediate light sweet crude oil ("WTI") traded on the New York Mercantile Exchange ("NYMEX") to be artificial by carrying out a cross-market trading scheme between January and April of 2008 involving the accumulation and sell-off of a substantial position in physical crude oil to manipulate futures prices.

During the relevant period Defendants allegedly traded futures and other contracts that were priced off of the price of WTI. WTI is delivered to commercial users at Cushing, Okla., a major crude oil delivery point. The price of WTI is a benchmark for crude oil prices around the world, and the supply of WTI at Cushing is an important driver of WTI price.

According to the allegations in the CFTC case, Defendants conducted a manipulative cycle, driving the price of WTI to artificial highs and then back down, to make unlawful profits. First, they allegedly purchased large quantities of physical WTI crude oil during the relevant period, even though they did not have a commercial need for crude oil. They allegedly purchased the oil pursuant to their scheme to dominate and control the already-tight supply at Cushing to manipulate the price of WTI upward and to profit from the corresponding increase in value of their WTI futures and options contracts on NYMEX and IntercontinentalExchange ("ICE").

 
At 4/07/2012 6:11 PM, Blogger Benjamin said...

Commodity Futures Trading Commission
Office of External Affairs Three Lafayette Centre 1155 21st Street, NW Washington, DC 20581 202.418.5080
Case Background Information
CFTC Press Release 5521-08, July 24, 2008, CFTC v. Optiver US, LLC, et al.
The Manipulative Scheme
The defendants’ scheme involved trading a large volume of Crude Oil, Heating Oil, and New York Harbor Gasoline futures contracts to manipulate the settlement price for these contracts. In each of the 19 instances charged, the defendants accumulated a large net TAS position in Crude Oil, Heating Oil, or New York Harbor Gasoline. The manipulative scheme involved trading a significant volume of futures contracts in the opposite direction of the TAS position, before and during the close of the contracts. The defendants’ goal in trading the large volume of futures was to improperly influence and affect the price of futures contracts in Crude Oil, Heating Oil, and New York Harbor Gasoline.
Specifically, the defendants’ strategy was to execute approximately 20 to 30 percent of Optiver’s futures trades just before the close and the remainder during the close. Because the futures contracts traded offset the TAS contracts, Optiver would profit if it could trade 20 to 30 percent of its futures contracts before the close for a price better than the settlement price and trade the remaining 70 to 80 percent of its futures contracts during the close, for a weighted average price close to the settlement price.

 
At 4/07/2012 6:23 PM, Blogger Benjamin said...

A Few Speculators Dominate Vast Market for Oil Trading
By David Cho
Washington Post Staff Writer
Thursday, August 21, 2008; Page A01

Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.

But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.
The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.

The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders

Read more: http://www.city-data.com/forum/business-finance-investing/412016-news-speculators-hold-81-oil-contracts.html#ixzz1rOrITnRu

 
At 4/08/2012 3:09 AM, Blogger Ron H. said...

Bunny:

Give it a rest. It's tiresome.

 
At 4/08/2012 8:14 AM, Blogger VangelV said...

1. The cost advantages of outsourcing factory work are narrowing. Emerging market wages, while still much lower than U.S. wages, are rising, and high oil prices have made shipping more expensive. That is expanding the range of goods U.S. factories can produce at competitive prices (think sophisticated machines, not toys).

Sorry but Mexico is still far cheaper than the US. The labour force works hard and is dependable. The regulatory environment is far more reasonable and a great deal less intrusive.

2. A weakening dollar makes U.S. goods more attractive to foreign buyers. The dollar has fallen by nearly one-third over the past decade against a basket of currencies including the euro, British pound and yen.

Thought experiment. Imagine how well the US economy will be doing if the USD was devalued by 75%. This 'weak US dollar is good for the economy' is about as stupid a concept as you can find yet people keep bringing it up over and over again.

3. Energy production is booming in the U.S., and domestic natural-gas prices have recently plunged. That gives an edge to U.S. producers of fabricated steel, transportation equipment, machinery and chemicals, which use natural gas extensively, according to a recent report from Citigroup."

Just how stupid are these analysts? The falling natural gas prices means that production cannot be maintained unless it is subsidised by someone. If you are losing money by producing shale gas eventually you will run out of money and will have to stop producing shale gas. Anyone who invests in the expectation that such production is sustainable will have to write down the investments. End of story.

 
At 4/08/2012 8:19 AM, Blogger VangelV said...

That is one reason that both Ford and GM are making major investments in the U.S. and why Ford plans to hire 6,000 more workers in the coming years. Ford is also moving production back to the U.S. from Mexico and Japan.

Reality check. GM is stuffing the inventory channel. That means that sales are not keeping up with production and likely signals layoffs after the election is over, not more NA based hiring. From what I have seen GM will close down EU and NA plants as it shifts production to China, Mexico, and FSU countries.

 
At 4/20/2012 6:55 PM, Blogger james said...

We have been steadly losing manufacturing jobs over the last thirty years. And over the last ten years at a alarming rate. Only about ten percent of all the jobs in the USA are in manufacturing today' compared to twenty percent in 1980.

 

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