Energy Independence: Reviving U.S. Factories

The shale gas boom should cut costs throughout the value chain

    View All  

Those juicy margins have prompted a variety of companies to expand operations. Dow Chemical (NYSE:DOW) plans to spend nearly $4 billion over the next five years on new facilities, while Exxon Mobil (NYSE:XOM) has recently filed permit applications to expand its Baytown petrochemical complex.

Also benefiting is America’s steel industry. Using natural gas as both as a fuel and a reducing agent to produce iron, input costs for U.S. producers are now  roughly one-third those of their European rivals.

That could shrink even more as steel companies change their production methods to a process called direct-reduction iron (DRI). Producers in the U.S. were slow to adopt DRI because they didn’t have enough low-priced natural gas to make it worthwhile. But now, mini-mill leader Nucor (NYSE:NUE) is building a new DRI facility in Louisiana and has hinted that it plans to build a fully integrated steel mill. That’s something no steelmaker has done in the U.S. in more than 50 years.

Finally, electricity prices in the U.S. are the lowest of any industrial nation in the world, thanks to shale gas. These low energy-input costs could be the key to combating the pull of cheap labor in Asia and helping manufacturers bring back lost production. The benefits of on-shoring U.S. manufacturing intensify when you add the cost of shipping goods across the Pacific Ocean.

ETFs Are the Best Long-Term Play Here

While today’s ultra-low natural-gas prices won’t last forever – for many E&P players, including Quicksilver Resources (NYSE:KWK), current prices are under the marginal cost of production — they should remain in a comfortable range for the foreseeable future. That should cut costs all the way down the manufacturing value chain to finished goods.

For investors with a long time frame, the resulting resurgence in manufacturing could lead to portfolio gold.

Still, it makes little sense to pick single stocks now and hope for the best. There’s too much volatility, and it’s too easy to make the wrong bet.

So a pair of low-cost exchange-traded funds from Vanguard could be the best way to play this happy trend. Pairing the Vanguard Materials ETF (NYSE:VAW) with the Vanguard Industrials ETF (NYSE:VIS) provides broad exposure to the wide range of companies that will benefit from continued lower natural-gas prices.

The materials fund’s 137 holdings include a 54% weighting in chemical manufacturers and a nearly 7% weighting in steel producers. The companies in the industrial ETF will gain from lower input costs derived from raw materials. Ultimately, this pair of ETFs represents the best long-term way to participate in the rebirth of U.S. manufacturing.

With expenses for these funds running at a mere 0.19%, it will cost investors little to hold the pair as this decade-long story plays out.


Article printed from InvestorPlace Media, http://investorplace.com/2012/06/energy-independence-a-resurgence-of-american-manufacturing/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.