Rising Chemical Costs Threaten U.S. Manufacturers

Up to one-quarter of U.S. manufacturers surveyed say they may shift some production offshore because the high cost of natural gas is driving up the price of vital chemical raw materials, according to a study commissioned by the National Association of Manufacturers.

"At stake is not only the future health of chemical manufacturing firms, but also the thousands of companies that use their chemicals to make everything from crayons to computers," says NAM President John Engler.

The report, based on findings from a survey of 165 U.S. manufacturing companies in late 2006, found that 62% of the firms see chemical prices rising "substantially," while 43% see domestic chemical capacity decreasing. As a result, 25% of these companies say they will move about one-third of their production offshore unless these cost and supply pressures subside.

"Domestic chemical supplies are a vital raw material to most manufacturers in America, but rising natural gas prices are forcing U.S. chemical manufacturers to consider moving offshore," says Kevin O'Marah, senior vice president of AMR Research, the Boston-based business consulting firm that conducted the study.

"Many of the large manufacturers that source those chemicals say they will follow them in order to remain competitive," he notes. "Smaller manufacturers will be affected, as they are less able to relocate production offshore and are likely to see reduced demand for their products if their big-company customers close domestic plants."

Of the companies surveyed, two-thirds say they depend, either directly or indirectly through their suppliers, on chemicals as a major raw material. Half say they cannot replace these materials with any substitutes, and 40% say it is possible but more expensive to find replacements.

The study notes that the cost of energy in the U.S., particularly natural gas, has risen dramatically compared to other major industrial economies. It says this is a major reason why more than 80 new, large-scale chemical plants are either under construction or in the planning stage around the world, but none are being built in the U.S.