A manufacturer is nothing without its raw materials. The physical inputs that go into creating a product lay the foundation for the whole process and should not be overlooked or dismissed as unimportant. Cross-border costs of raw materials and resources have a huge impact on company profit, and can even tank an operation’s bottom line.
This blog is the sixth in a series detailing the costs associated with moving production overseas. Read more:
This article focuses on three critical resources—energy, raw materials and land—and their favorable costs and availability within the United States as well as the risks of changing costs overseas.
Natural Gas
The United States has recently been fortunate to experience a ten-fold surge in the production of natural gas, which has both lowered costs and decreased scarcity issues. This gas boom has
caused natural gas prices to plummet in the U.S. Gas prices have fallen worldwide, but still
remain significantly higher than the cost of natural gas in America.
The supply is widely available for manufacturers to use as a source of energy and a raw material. U.S. manufacturers are currently using the ample supply of natural gas to process heating, steam generation and petrochemical processing. The gas boom has actually been linked to an increase in petrochemical manufacturing and a boom within the steel and natural gas harvesting equipment industries.
Note that while the gas boom has been a source of prosperity for the U.S., the nation recently began shipping some of its gas supplies overseas, which may drive a wave of lowered prices across Europe and Asia and they try to compete against these record-low prices. Whether competitors overseas will actually be able to match these prices remains to be seen.
Oil
The United States is currently more energy independent than it has been at any time within the past 20 years. The natural gas boom coupled with increased crude oil production means U.S. manufacturers need not worry about the supply of energy available to them.
But oil production and trade takes place on a global scale, and we would be remiss to ignore the world’s current events surrounding oil. In the past decade, Canada and the Middle East also saw increases in oil production, which has benefitted manufacturers, especially those that make petroleum-based goods. But as oil supplies increased, many economies, especially in Europe and developing nations, have not seen the economic boom needed to take advantage of a hefty supply of raw materials. As a result, crude oil prices dropped drastically in the early 2010s. These prices
started to rebound after 2016, but plummeted again as a result of the COVID-19 pandemic.
Clearly, oil prices are set on the global stage and companies would be misled if they analyzed oil prices to find the best country to set up shop. What is instead a meaningful statistic is the price of oil-based products like gasoline, which can vary dramatically between countries.
Source: Economics and Statistics Administration analysis using data from the World Bank
It goes without saying based on the chart above that the United States has excellent, competitive prices in the gasoline marketplace, a measurement useful for determining viability for manufacturers.
Electricity
This section is simple, to the point and numbers-driven. In the same vein as oil and natural gas, the United States has a favorable climate for sourcing electricity in terms of the following factors:
- Procedures: The number of regulatory procedures required to get electricity
- Time: The time involved in getting electricity
- Cost: Electricity prices
The following chart shows a comparison of each of these factors across several major nations.
Source: Economics and Statistics Administration analysis using data from the World Bank, Doing Business project.
Note that around 25% of electricity generation is fueled by natural gas, so the boom in natural gas has also played a role in creating favorable electricity conditions in the U.S.
Real Estate
While the prices for the energy sources we’ve discussed thus far are decided on a global stage, the cost of land is very localized. Because prices vary based on several factors that transcend borders, it is difficult to get such exact numbers in land price comparisons. However, the World Bank’s Doing Business project does its best to make accurate comparisons by factoring in the "steps, time and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and a building that is already registered and free of title dispute." Note that these factors revolve mainly around startup costs, which are of interest to any manufacturers looking to move operations overseas.
The following table displays the result of this research.
- Procedures: The number of regulatory procedures required to purchase real estate
- Time: The time involved in purchasing
- Cost: Regulatory costs as a percent of purchase price
Source: Economics and Statistics Administration analysis using data from the World Bank, Doing Business project.
With this data in mind, it’s clear manufacturers looking to move production overseas simply must take into consideration the cost of the raw materials needed to create their product, the energy sources needed to power their facilities and the land required for operating. As illustrated by the cost of natural gas
plummeting in the past decade, costs are subject to change quickly, but forecasts show the United States is set to maintain favorable costs of energy and land in comparison to other countries into the near future,
Oftentimes it’s best to avoid yo-yoing prices, regulatory compliance costs, political risks and other uncertainties of international business by keeping production domestic and taking advantage of the United States’ favorable climate for manufacturers.
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