Reindustrialization in USA - Euler Hermes

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Euler HermesEconomic Outlook n° 1187 | Special Report | The Reindustrialization of the United States• • • u Sector opportunitiesManufacturing industry GDP in Texas is $192 billionor 10% of all U.S. manufacturing. The concentrationof industries within Texas manufacturing is shown inTable I below. The first column in the table indicatesthat petroleum and coal products comprise 26% ofall manufacturing in Texas. Along with chemicalsat 20%, these top two industries are responsible fornearly half of the manufacturing output of Texas.There are significant contributions from computerand electronic products and machinery as well. Thesecond column indicates that of all the petroleumand coal product manufacturing in the U.S., 26% ofit is performed in Texas. Texas also produces 15% ofall U.S. chemical products. Once again, there are significantcontributions from computer and electronicproducts and machinery.I. Texas ‘ ID Card% of Texas % of total USmanufacturing in TexasManufacturing 100% 10%Petroleum and coal products 26% 26%Chemicals 20% 15%Computers and electronic products 14% 9%Machinery 10% 12%Fabricated metal products 6% 9%Food, beverage and tabacco products 6% 5%Other transportationequipment 3% 3%Plastics and rubber products 3% 7%Source: Bureau of Economic Analysisu PetroleumThe Texas economy has long been dominated by theenergy sector. Texas is the number one producer ofcrude oil, natural gas and total energy in the U.S., witha 15.3% share of total U.S. energy production. It has24% of U.S. crude reserves, 31% of its production, andis the number one consumer. Texas also has 29% ofU.S. dry natural gas reserves, 30% of its productionand is the number one consumer.In 2011, its 26 refineries accounted for 27% of all U.S.refining capacity. The refinery business is likely to seesteady growth going forward as demand from thechemical industry will be ramped up by cheap naturalgas. Several of the largest oil companies in the worldare headquartered in Texas, including Exxon-Mobiland ConocoPhillips. It has nine major sea ports forexporting and importing petroleum products. WestTexas Intermediate (WTI) remains the benchmarkgrade for crude oil in the U.S. and its price is currentlybetween $15 and $20 per barrel less than the globalbenchmark, Brent crude, because the U.S. currentlyhas a glut of WTI. High production combined withlimited pipeline capacity to transport to refineries hascontributed to the excess. While Texas is the numberone producer of crude oil in the U.S., output has fallento less than one third of its peak in 1972.Although there is no doubt that crude productionwill remain a robust industry for decades to come,growth prospects may be limited. By contrast, naturalgas production is on the rebound. Huge new reservesof shale gas have become recoverable because ofdevelopments in fracking and horizontal drilling.Much of the natural gas production goes directly toelectricity production, which will likely be a growthindustry for the foreseeable future. Texas is the numberone producer and consumer of electricity in theU.S. Another significant source of demand is fromchemical manufacturers who use natural gas as afeedstock. The adoption of natural gas as a fuel forvehicles also offers great promise in the long run.Texas also leads the country in coal consumption withthe majority of its supplies coming from Wyoming.Coal mining and consumption is likely to be a weakerindustry in the long run because of its emissions andbecause of competition from cheap natural gas. Onebright spot in the coal industry is increasing demandfrom China, which is the world’s largest consumerand importer of coal.26Despite being an economy heavily dependent onfossil fuels, Texas is also the nationwide leader inwind power. There are over 2,000 turbines in westTexas alone, and the largest wind energy facility in the
Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United StatesEuler Hermesworld is located in central Texas. While crude oil productionand refining are likely to be in high demandgoing forward, it would appear that true growthopportunities in Texas energy lie more in natural gasand renewables.u ChemicalsAs in the petroleum industry, Texas is the leader inU.S. chemical production with over 200 chemicalplants. The industry provides employment for over70,000 workers at an average salary of over $85,000per year. The state’s abundant supply of natural gasand its large refining capacity are the main contributorsto the strong presence of the chemical industryin Texas. But unlike crude oil production and refining,the chemicals industry is set for strong growth, dueto the emergence of very cheap natural gas. Naturalgas is used as a “feedstock” or basic raw material inthe production of many chemicals, so its precipitousfall in price is also lowering prices for many goodsdownstream. There are thousands of productswhich use chemicals extensively for their manufacturing:apparel, auto parts, clothes, fertilizer, packaging,paints, pharmaceuticals, rubber, and all theplastic products which make up so many everydayitems such as appliances, furniture, and the seeminglyendless array of consumer electronics such aspersonal computers, tablets, smartphones, TVs andmany others.• The Texas Emerging Technology Fund is designedto attract R&D to the state; and• The Texas Enterprise Fund also provides financingto worthy projects. Recently the Fund providedapproximately $1million each to chemical manufacturersDow Chemical and Kuraray America tohelp finance their expansions.As far as exports are concerned, like in so many othermeasures, Texas is number one in the nation, exporting$250 billion in 2011 with a 17% share of all U.S.exports. Exports grew in 2011 over 2010 at a blistering21% rate. Over 20% of Texas exports were refinedpetroleum products, followed by coal, chemicals,computer and electronic products, non-electricalmachinery, and transportation equipment. The topexport markets were Mexico with a 35% share, followedby Canada at 8%, and China at 4%. These topthree countries buy almost half of Texas’ exports. Asignificant portion of exports to Mexico is likely to begoods which are then assembled or modified in Mexicoand re-exported to the U.S. ©The drop in natural gas prices along with lower unitlabor costs now make the U.S. one of the cheapestchemical producers in the world. According to PricewaterhouseCoopers, “U.S. chemical manufacturersnow have a 50-to-1 price advantage over foreigncompetitors forced to rely on much more expensivepetroleum products. Shale gas represents a oncein-a-centurychange in the competitive balanceworldwide." This change is likely to move significantnumbers of jobs back onshore. As a result, at least adozen major chemical plants are rapidly expandingin Texas, and expectations are that these projects willentail $15 billion in investments, and create as manyas 20,000 new jobs. Clearly the chemicals industry inTexas is poised for strong growth.u Public incentives and export routes arecontributing to this favorable outlook in TexasTexas offers a number of government incentives topromote growth:• Economic Development Corporations helpfinance both new and existing businesses;• Value Limitation tax credits are available forjob-creating construction projects;27
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Reindustrialization in USA - Euler Hermes

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