It is a widely accepted fact that China’s astounding economic success over the last three decades has been created through the ability of Chinese manufacturers to make products cheaper than anyone else. For this reason, the country has become the workshop of the world – particularly for low end products – exporting $25 billion worth of plastic products each year.
This conventional thinking is now being turned on its head by a recent report which claims that it is now cheaper to manufacture plastic goods in the US than to export them from China.
The claim is based on an economic study on what led manufacturers to offshore plastic production to China – concluding that those trends have now been reversed. This may lead many companies to taking advantage of these new economic conditions to return plastic production to the States.
This is because Shale Crescent USA’s mission is to promote petrochemical production in the Ohio Valley, meaning that its analysis should be considered with caution. However, the data they have collected does point to a shift in economic circumstances for plastic producers in both the US and China, with the report focusing on the following factors:
Perhaps the most momentous change to the economic balance in the plastic sector is the new resin supply located in the ‘Shale Crescent.’
Specifically, the Marcellus and Utica natural gas fields, deemed by the industry journal Plastics Today to be, “… the most prolific such fields in the United States.” Adding that, “The Shell cracker plant near Pittsburgh, which began operation last month … is the first major polyethylene manufacturing complex in the northeastern United States.”
Specifically, the report highlights how cheap shale gas now gives the US petrochemical industry an energy price advantage over the Chinese sector. Stating that, “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.” Noting that, “Projections show that electric prices will continue to trend in favor of the U.S.”
Years of Chinese manufacturing success and wealth may also have tipped the balance in favour of onshoring production to North America. The report stating that, “Over the past 25 years, China’s manufacturing wages have increased more than tenfold and continue to rise. [While] China’s manufacturing industry averages annual compounded wage rate increases of more than 10 percent.”
Despite US wages remaining higher than Chinese wages for comparable work in the plastics sector, today’s labour market plays a less significant role in profit margins than it did before. The report observing that, “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.”
Manufacturing Lease Rates
Many of China’s once empty fields have now been filled with a manufacturing powerhouse largely located near the coast for easy access to ports. This space is now becoming more limited, increasing lease rates for manufacturing sectors.
Not for the first time, fuel prices have sky-rocketed in recent years reducing the viability of plastics production so far from markets. At the same time, blockages in the supply chain caused by the pandemic have made domestic production a far more attractive option. Given the environmental costs of shipping products around the world at a time when consumers are increasingly sensitive to emissions and achieving Net Zero – especially over fossil fuel products – then the arguments against Chinese-based production begin to add up.
Add to this list, “China’s bizarre zero-COVID policy — a self-inflicted wound on manufacturing and commerce” and it is understandable why the report claims that “the offshoring calculus has radically changed.”
The desire to re-shore plastics production is based on more than just patriotism. As Plastics Today’s Norbert Sparrow notes, “If we can build it here, we should, because we simply should not be an accessory to China’s ambitions.” Adding the moral reasoning that, “[not only does] China not respect intellectual property rights. More recently, it has become a belligerent force, crushing dissent in Hong Kong, herding minority populations into ‘re-education’ camps, and threatening the status of Taiwan.”
However, it is ultimately the economic case that will decide the fate of any onshoring plastic production to Ohio. The ‘Made in the USA’ sticker that aids sales and intercontinental transportation costs have always been compelling arguments to keep plastic production domestic. The opening of a new cracker plant now making feedstock/resin available so close to home may prove to be an irresistible temptation for the US plastics sector.
As the report itself concludes, “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. These changes are fundamental, long term, and will continue for the foreseeable future.”
If the economic case is true, then we may not have to wait long to see the future of plastic production moving out of China.
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