Wednesday, October 5, 2011

Shale Gas Boom Helps U.S. Manufacturers

Most investors are well aware of the current shale gas boom which has transformed the U.S. natural gas industry.

But many investors are not aware that the shale gas boom, with its lower natural gas prices, is also beginning to have an effect on U.S. manufacturers.

The price of natural gas in the United States is now half what it was just three years ago, thanks to new drilling technology. In comparison, Asian natural gas prices are three times higher.

A lower natural gas price is helping turn the fortunes of energy-hungry U.S. manufacturers around. Factories mothballed as natural gas prices hit record highs a few years ago are now re-opening. Some manufacturers are even opening new plants.

One such business is the fertilizer industry. Natural gas is the main input for nitrogen fertilizer, such as urea. High prices led to a shut down of half the North American nitrogen fertilizer production capacity early in the last decade. So today, North America imports half of its nitrogen fertilizer needs.

But lower gas prices are changing that dynamic. Stephen Wilson, CEO of CF Industries (NYSE: CF), said “For the first time in decades, American manufacturers of nitrogen fertilizer and other energy-intensive products are in position to contemplate building new plants and hiring new employees.”

Gas is also a key feedstock for the petrochemical industry. Cal Dooley, CEO of the American Chemistry Council, stated “It's probably the single greatest factor for the US petrochemical industry in terms of our competitiveness internationally.”

American companies using cheap natural gas have a definite edge over their overseas competitors with oil trading near a historically high multiple to natural gas. International chemical companies use naphtha, an oil derivative, to make basic chemicals.

With the recent decline in the stock prices of U.S. industrial companies, investors should be looking for bargains in the fertilizer and chemical sectors.

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