A new report from an organization called Shale Crescent USA says the US is reclaiming manufacturing advantage the production of plastics goods, a sector that largely left the US over the past 20 years.
And if that’s true for plastic products, it may be the same for other sectors as well.
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What is Shale Crescent USA? Its web site says that it is a non-profit organization with a mission to encourage business growth along the Ohio River Valley based upon low natural gas prices that allow manufacturers to operate more efficiently while producing products more economically.
The “crescent” in the name appears to come from an arc connecting southern Ohio with southwest Pennsylvania and West Virginia.
In its recently released report, the organization says rather boldly that China has lost its manufacturing competitive advantage, and that the annual $25 billion of exported plastic-based goods from China represent a vulnerable and accessible market share opportunity for US operations.
If true, that would reverse a trend away from domestic production of plastic products, from toys to car seats for children and thousands of other products.
Of the $53 billion of plastic-based imports to the US each year, nearly half originate in Asia, with China accounting for $25 billion, a 300% increase in just the past ten years.
Not mincing word, the report says that “What has been a long-held belief – it is cheaper to import plastic based manufactured goods – is no longer true.”
Representing the interests of shale-produced oil and natural gas across those three states, the report says that feedstock/resin and transportation are the largest cost drivers of globally produced plastic-based goods.
And the study finds that close proximity to low-cost raw materials coupled with direct access to consumer markets “provide US manufacturers with significant cost advantages over China-based competitors, who must import raw materials and export finished goods.”
Key of course is the shale gas revolution, which netted low-cost natural gas and natural gas liquids, which are used to produce plastic resin.
Of note, the report says that combined Ohio, West Virginia, and Pennsylvania produce one and a half times more natural gas than the entire country of China. China, in fact, is energy deficient and therefore reliant on global supply chains to either import plastic resin or produce resin from much costlier oil-based naphtha.
The report lists a number of areas where the US has now achieved competitive advantage over China.
Feedstock/Resin: Currently, US and China commodity resin prices are comparable, but the forces of supply and demand are positioned to positively impact U.S. resin prices. The US is a net exporter of polyethylene and China is a net importer. In addition, the US uses low-cost natural gas to produce resin while China uses more expensive oil-based naphtha. Since more than 80% of PE production costs are dependent on the type of feedstock and energy used, the report says, US resin producers experience greater margins and higher overall profits compared to overseas producers.
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Labor Rates: Over the past 25 years, China’s manufacturing wages have increased more than ten-fold and continue to rise. China’s manufacturing industry averages annual compounded wage rate increases of more than 10%. Increased use of automation and productivity enhancements have decreased the labor cost input of manufacturing and increasing wages in China have eroded China’s historical labor cost advantage.
Electricity: US electric prices have shown relatively stable or downward trending rates over the last eleven years. This can be attributed in part to a newly abundant and accessible fuel source, natural gas, used for power generation. Between 2010 and 2021, industrial consumers in the state of Ohio have experienced nationally competitive rates around 6.50¢ per kilowatt- hour (kWh). In China, industrial electric rates averaged 10.00¢ (kWh) over the same period and have shown volatility and intermittent outages. Projections show that electric prices will continue to trend in favor of the US.
Manufacturing Lease Rates: China has experienced exponential growth in its manufacturing sector since the turn of the century and the decreased availability of industrial space has driven demand resulting in increased lease rates. Lease rates in the industrial provinces of China range from $6 – $7 per sq./ft. compared to Ohio’s average of $4-$5 per sq./ft.
Transportation: Ohio based operations have both resin supply and consumer demand for finished products inside a geographic radius that can be reached in a one-day drive. The elimination of complex supply chains creates an enormous transportation advantage. China operations are required to import raw materials and export finished products. The transport of feedstock/resin to China based manufacturers coupled with the transport of finished products to the U.S. is an estimated 20,000 miles.
The report shows the chart below showing a total cost advantage for Ohio-made plastic products small and large versus costs to produce and ship from China:
In comparing manufacturing in Ohio versus China, transportation emerges as the major differentiator, with growing significance as part size increases, the report also finds.
“The upward trends of labor, energy, and transportation costs associated with China defines a long-term shift,” it concludes, adding that “The trend of individual cost drivers can be considered long term, fundamental, and protected from volatility for a timeframe measured in decades.”
The full report is available here: Global Economic Factors Align Favoring U.S. Based Plastic Product Manufacturing over China Operations
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